V Minerals and Metals
Author:
International Monetary Fund
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Language:
English
Print Publication Date:
01 Jan 1988
Keywords:
WEFS; commodity price; dollar price; soybean oil; export quota; commodity export volume; food commodity; terms of SDR; tin price; consumer goods; world consumption; durable goods production; Consumption; Stocks; Metals; Exports; Copper; Eastern Europe
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Abstract

Prices of many minerals and metals rebounded sharply in 1987 (Chart 7). From the fourth quarter of 1986 to the fourth quarter of 1987, the price of copper in terms of SDRs increased by 67 percent, that of nickel by 60 percent, aluminum by 44 percent, and lead by 20 percent (Table 56). When measured in terms of U.S. dollars, these price increases were even greater. The large price rises were associated with exceptionally low stock levels: by 1987 stocks of these metals had been reduced to such low levels that any supply interruption or unexpected strength in consumption was quickly reflected in higher prices. By comparison, the changes in the prices of iron ore, tin, and zinc were small, while a substantial drop—nearly 20 percent in SDRs—occurred in the price of phosphate rock.

Prices of many minerals and metals rebounded sharply in 1987 (Chart 7). From the fourth quarter of 1986 to the fourth quarter of 1987, the price of copper in terms of SDRs increased by 67 percent, that of nickel by 60 percent, aluminum by 44 percent, and lead by 20 percent (Table 56). When measured in terms of U.S. dollars, these price increases were even greater. The large price rises were associated with exceptionally low stock levels: by 1987 stocks of these metals had been reduced to such low levels that any supply interruption or unexpected strength in consumption was quickly reflected in higher prices. By comparison, the changes in the prices of iron ore, tin, and zinc were small, while a substantial drop—nearly 20 percent in SDRs—occurred in the price of phosphate rock.

Chart 7.
Chart 7.

Prices of Minerals and Metals, 1980–87

(In SDRs; indices: 1980 = 100)

Table 56.

Prices of Minerals and Metals, 1979–88

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Source: Commodities Division, IMF Research Department.

The weights in the index are as follows: copper, 26 percent; aluminum, 20 percent; iron ore, 19 percent; tin, 10 percent; nickel, 8 percent; zinc, 6 percent; lead, 5 percent; and phosphate rock, 6 percent.

London Metal Exchange (LME) price, c.i.f. U.K. ports.

LME price, c.i.f. European ports.

LME price, c.i.f. European ports.

LME price, c.i.f. Northwest European ports.

LME price, c.i.f. U.K. ports.

LME price, c.i.f. U.K. ports.

Brazilian ore, c.i.f. German ports.

Cold rolled coil, price for export, f.o.b. European Coal and Steel Community mills.

Moroccan rock, f.a.s. Casablanca.

The low stock situation that prevailed in 1987 in the markets for most metals and minerals developed in response to the depressed demand and price situation of the early and mid-1980s. Activity in metals-using sectors in the major industrial countries declined progressively each year in the early 1980s. An index of production aggregated for these sectors in the seven major industrial countries shows a decline of 2.6 percent, 2.5 percent, and 2.3 percent for 1980, 1981, and 1982, respectively (Table 57). These declines were more than matched by decreases in the consumption of metals over this period. Although by 1981 world production of metals also began to decline and declined by a large amount in 1982, world production continued to exceed world consumption, leading to an increase of stocks of nearly 50 percent over the three-year period. As a consequence of these developments, in 1982 the index of prices of minerals and metals had fallen 12 percent below its level in 1980 in terms of SDRs and was 25 percent lower in dollars.

Table 57.

Movements in Prices of Minerals and Metals and Related Economic Indicators, 1980–87

(Annual percentage changes)

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Sources: Commodities Division and Current Studies Division, IMF Research Department.

Refers to IMF world index of prices of minerals and metals. These percentages differ from those reported in the World Economic Outlook which refer to the index of commodities exported by developing countries.

Index of dollar prices of minerals and metals deflated by the index of dollar unit values of manufactured exports.

Production in metals-using sectors of the seven industrial countries weighted in accordance with metals consumption in each sector.

Overall indices constructed using the same weights for the indices of individual commodities as in overall (world) price index. The commodity coverage of the indices of consumption and stocks is less comprehensive (includes only metals) than the coverage of the indices of production and supply (includes iron ore and phosphate rock).

Supply is defined as production plus beginning-of-year stocks.

Following the buildup of metals stocks from 1980 through 1982, there was a steady reduction from 1983 through 1987. Changes in production policies, lower desired inventory levels, and economic expansion leading to increases in metals consumption all contributed to this turnaround. Because of the extended period of low prices, many companies closed unprofitable operations and dramatically reduced costs at others. As a result, beginning about 1983 and lasting into 1987, there was a fairly continuous period of mine closures. In addition to making reductions in wages of their employees, many mining companies dramatically cut the size of their labor force, including significant reductions in the number of layers of management. The streamlining of operations served to reduce costs worldwide. Consumers of metals, on their part, adapted to the stock buildup and falling prices of the early 1980s by pursuing minimum inventory policies for metals and purchasing materials only when needed for immediate use. Following the declines in 1980–82, world consumption of metals increased by 3.5 percent in 1983 and by nearly 6 percent in 1984. In 1983 there were particularly large increases in many industrial countries in the output of the metals using sectors, including increases in automobile production and in housing starts. In 1984 exceptionally large increases in industrial production and in domestic fixed investment were recorded in these countries. Despite this activity, the overhang of large stocks and the persistence of excess production capacity meant that prices of minerals and metals increased by only a small amount in 1983–84. With the lower rates of economic growth in 1985–86 and despite much reduced stock levels, prices of most minerals and metals fell below even the 1982 trough.

The weakness in the prices of minerals and metals in the mid-1980s, notwithstanding large reductions in stocks, can be explained by the perception that excess productive capacity existed and that additional supplies would be readily available. Toward the end of the first quarter of 1987, however, this perception was tested when relatively minor supply disruptions led to increased prices for both copper and aluminum. As consumers bid for additional supplies—which came from already low stocks rather than from additional production—the fundamentally tight situation became evident. The tightness in the near-term market for these two metals was evidenced by the fact that for most of 1987 spot prices were significantly above the futures prices. The psychology in many of the metals markets quickly shifted from one of perceived excess capacity and desired inventory decumulation to one of market tightness and desired inventory buildup. The situation was accentuated by stronger-than-expected growth in consumption of metals in 1987 in the United States, in Japan, and in the newly industrializing countries of Asia, although the overall rate of growth of world consumption was only moderate.

At the end of 1987, reported commercial stocks measured in terms of weeks of consumption were extremely low (Table 58). Copper stocks were even lower than in the period of tight supplies during 1973–74 when copper prices rose from roughly 50 cents a pound to 130 cents a pound and then fell to 60 cents. Expressed in terms of weeks of consumption, reported commercial stocks of copper at the end of 1987 were roughly 30 percent below the low level at the end of 1973. Similarly, aluminum stocks during 1987 were at a level comparable to the low level at the end of 1979. Aluminum prices increased from 64 cents per pound in December 1978 to 97 cents a pound February 1980 and then progressively fell to 65 cents by December 1980. Stocks of zinc and lead at the end of 1987 were also at low levels, below those in either 1973–74 or 1979.

Table 58.

Reported Closing World Commercial Stocks of Selected Metals, 1973–87

(Weeks of consumption)1

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Sources: Based on data on stocks in World Metal Statistics (London: World Bureau of Metal Statistics), various issues, 1975–87.

Calculated in relation to consumption in year closing.

The rebounding of metals prices in 1987 should be seen as a response to the closure of some of the excess capacity that had been overhanging the market and a means for stock correction rather than as a signal of longer-term higher prices. The factors that were of concern on the demand side throughout the 1980s, namely “downsizing,” particularly of automobiles, and “miniaturization,” particularly with reference to electronics, continued to be relevant. Technological changes resulting in the use of a lower quantity of metals per unit of output and the use of plastics and other materials as substitutes for metals did not abate. Consequently, while the economic environment continues to be one of only modest overall economic growth, the growth in metals consumption is likely to continue to be even lower.

The supply side adjustments made in the industry in response to the lower prices of the early and mid-1980s can be expected to have a significant impact on the price outlook for minerals and metals. With the closure of high-cost facilities and the initiation of new investment in only low-cost projects, many mining companies have made adjustments in their operations that could enable them to continue to operate at the low prices prevailing in 1986. Having positioned themselves to survive at 1986 prices, these companies earned substantial profits in the higher price environment of 1987. It would appear that the trough in prices for most minerals and metals was indeed reached in 1986 as a considerable part of the excess capacity that was evident in the early 1980s has remained closed and the reopening of these facilities would require major new investment. Barring a recession, therefore, it is unlikely that prices will fall again to 1986 levels in the near future. Prices are likely to fall from late-1987 levels, however, as the production response to these prices materializes.

Copper

Following an extended period of depressed prices from 1982 through 1986, copper prices increased dramatically in 1987. In the fourth quarter of 1987 the dollar price averaged 111 cents a pound, nearly twice the price for the comparable quarter a year earlier.78 During December 1987 the price of copper rose as high as 145 cents a pound, although the price fell back to average 111 cents a pound in the first quarter of 1988.

Despite the strong growth in world copper consumption in 1986, of about 5 percent, and a continued voluntary reduction in inventories that brought copper stocks to very low levels, the price of copper began to increase only about the middle of 1987. While stocks at the end of 1986 were at levels comparable to those during previous periods of shortage, such as 1973 and 1980 (Table 58), prices did not respond because the market apparently considered the new low levels as adequate. Copper prices had been virtually unchanged since 1984 and most consumers of copper did not feel the need to lock in supplies at low prices. The change in mid-1987 was triggered by strikes in Canada and Peru, production problems in Chile, and transportation problems in Zambia. Spot prices began to increase sharply, and as futures market prices remained well below spot prices, incentives were clearly directed toward rapidly bringing additional supplies on to the market. The added supplies, however, were modest and could not keep pace with the growth in demand. After the lengthy period of low copper prices and mine closures, producers were reluctant to reopen properties because of uncertainty regarding the overall economic outlook and the expense and lengthy gestation period involved. Nevertheless, with copper prices at the end of 1987 over two times the estimated average operating cost of production for many companies, eventual production increases are likely to cause prices to decline.

A 5 percent increase in world refined copper consumption in 1986 followed a four-year period over which the total increase was only 1 percent (Table 59). The increase in 1986 occurred primarily because of rapid growth of consumption in the United States, China, and in the newly industrializing countries of Asia. Copper consumption in the United States has continued to exhibit a high degree of variability, increasing by 9 percent in 1986 after declining by 10 percent in 1985.79 One of the major factors influencing the strength of U.S. copper consumption in 1986 was housing construction. The number of housing starts increased by almost 4 percent during 1986. Capital investment in infrastructure and modernization of existing plants led to rapid growth in metal consumption in China in 1986. An 18 percent increase in industrial production in China in 1985 contributed to an increase of 10 percent in copper consumption in the year. In 1986 copper consumption in China increased by 4 percent, in part reflecting a very large increase of 8 percent estimated for its gross national product. In 1986 copper consumption grew by about 23 percent in the newly industrializing countries of Asia. This dramatic increase was the result in part of a significant rise in consumption in both the Republic of Korea and Taiwan Province of China. Copper consumption in the Republic of Korea increased by 25 percent because of an export boom. In Taiwan Province of China, following a sharp reduction in 1985, consumption rose by over 50 percent, although most of this increase represented a return to the 1984 level of copper consumption. In Japan, however, consumption declined by 1 percent in 1986, largely because of the impact of the strong yen on export sales of final products containing copper; this effect was partly offset by higher domestic demand, as the number of housing starts in Japan increased by almost 11 percent in 1986. In this period copper consumption in the U.S.S.R. was relatively stable; consumption increased by 2 percent in 1985 before declining by 1 percent in 1986.

Table 59.

Copper: World Commodity Balance, 1981–87

(In thousands of tons)

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Sources: World Metal Statistics (London: World Bureau of Metal Statistics), various issues in 1987, and CRU Metal Monitor: Copper (London: Commodities Research Unit Ltd.), December 1987.

Estimated by Commodities Division, IMF Research Department.

Excludes China and Council for Mutual Economic Assistance (CMEA) countries.

World production minus world consumption.

May not agree with production and consumption data because of differences in coverage.

Total commercial stocks reported in terms of weeks of world consumption.

In 1987 world copper consumption increased by a further 2 percent. U.S. copper consumption is estimated to have increased by almost 5 percent in 1987 because of a surge in activity in the manufacturing and business equipment sectors. Commercial construction and renovation activity, particularly in the third quarter, took up some of the slack in demand resulting from reduced housing starts. Increased activity in the investment sector was aided by moderate interest rates and depreciation of the dollar. The depreciation of the U.S. dollar enabled copper fabricators to regain domestic markets and be more competitive in export markets. Japanese consumption of copper is estimated to have increased by 2 percent in 1987, as the increase in domestic demand outweighed a weakening in export markets that was caused by a sharp appreciation in the yen. Housing starts in Japan in 1987 are estimated to be more than 20 percent higher than in 1986, or nearly double the 1986 rate of increase. Industrial activity, although weak overall, was strong in the sectors producing consumer goods. Copper consumption is estimated to have grown by approximately 3 percent in the rest of Asia, largely as a result of the strong export performance of the newly industrializing countries. European consumption growth was about 2 percent, with the strong consumption growth in France and Italy more than offsetting the weak growth in the Federal Republic of Germany and the United Kingdom.

Despite the lengthy period of low prices from 1982 through 1986, world mine production of copper rose, albeit at low rates. An increase of 3 percent in 1987 followed an increase of 1 percent in 1986. Growth in production in 1986 tended to occur in those countries in which there was a continuation of cost-cutting measures that had started in the early 1980s in response to low prices. These measures included the closure of high-cost mines, reduction in wages and overhead costs, and the introduction of low-cost methods of expanding production, such as leech and solvent extraction and electro-winning technology. In 1986 mine production increases of 4 percent in both Canada and the United States and of 3 percent in Chile more than offset decreases of 8 percent in Australia, 6 percent in South Africa, and 4 percent in Zambia. Zaire’s production remained unchanged. The estimated increase of 3 percent in world mine production during 1987 was in large part attributable to mine expansions, such as those occurring in Chile (Chuquicamata, El Indio, and El Soldado) and Mexico (Cananea and La Caridad). In addition, the new Ok Tedi mine in Papua New Guinea and the reopening of the Bingham Canyon mine in the United States also contributed to the increased production during the year.

In 1986 the expansions that occurred in mine production were generally reflected in refined production as well. U.S. refined production, which grew by 3 percent, had been enhanced by an additional secondary recovery, and in Chile refined production grew by 7 percent. Mine production in Zaire and Zambia, however, suffered from stagnation or decline, which was reflected in the roughly 4 percent drop in refined production in both countries during 1986. In 1987 the upturn continued; refined production is estimated to have increased by approximately 2 percent. This was attributable to strong production growth in Australia (11 percent), Japan (5 percent), the United States (5 percent), and Zambia (6 percent). Higher prices and a depreciated dollar contributed to the increase in U.S. production. The rise in Zambian production was a result mainly of the improved availability of equipment which had been a serious constraint on production.

Low rates of increase in world production have combined with somewhat higher rates of world consumption since 1983 to reduce world copper inventories. In terms of weeks of world consumption, reported commercial stocks declined from 9.7 weeks at the end of 1983 to 2.7 weeks by the end of 1987. In 1987, therefore, the strong consumption demand, supply difficulties, and low overall stock levels reinforced each other to maintain a very tight copper market, particularly in the second half of the year.

Table 60.

Copper: Export Earnings, 1984–87

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Sources: UN Conference on Trade and Development (UNCTAD), Yearbook of International Commodity Statistics, 1986 for exports; Commodities Division, IMF Research Department for market prices.

Data on exports are estimates of Commodities Division, IMF Research Department.

Copper content.

London Metal Exchange, spot delivery, higher grade cathodes, c.i.f. U.K. ports.

Over the near term, the attempt to rebuild stocks and ease supply constraints production will be balanced by scheduled expansions in the Bingham mine in the United States and at the Ok Tedi mine in Papua New Guinea. Expansions at other mines in Canada and Mexico are also anticipated. As expected, the high prices that occurred toward the end of 1987 have had little depressing effect on consumption since the demand for copper is quite inelastic in the short term. The only recent evidence of an impact of high prices on consumption was a modest shifting away from copper as roofing material in Europe. These prices have not yet resulted in a large increase in production as producers will be reluctant to increase production unless they expect prices to remain high. The current high prices are not expected to last much longer, but neither are they expected to return to the level of 60 cents a pound.

Earnings from exports of copper rose significantly in 1987 with increases in both unit values and volumes (Table 60). Earnings from exports of copper ore increased from 1.9 billion in 1986 to 2.4 billion dollars in 1987. While most of this growth is a result of a rise in unit values, the volume of exports is estimated to have increased by 6 percent, with developing countries responsible for most of the expansion. Refined copper exports, which are more important in international trade, are estimated to have risen in value from 4.6 billion U.S. dollars in 1986 to 6.1 billion in 1987. While most of the rise is attributable to higher unit values, export volumes also increased by almost 10 percent. The recovery in earnings from exports of copper ore and refined copper in 1987 in terms of SDRs, although lower than in terms of dollars, was nevertheless substantial: 19 percent for ore and 20 percent for refined copper. As in 1986, however, the increase in exports from developing countries was again limited by production and export difficulties, particularly in Chile, Peru, and Zambia. CODELCO, the largest producer in Chile, reported problems owing to weather and a lack of shipping capacity. Strikes and shutdowns also limited exports from Peru. Transportation problems played a key role in limiting Zambian exports.

Aluminum

The price of aluminum increased sharply during 1987, rising from an average of 52 cents a pound in the fourth quarter of 1986 to 83 cents a pound in the fourth quarter of 1987.80 The price in the latter part of 1987 and early 1988 was highly variable, rising to 97 cents in mid-October just prior to the stock market crash, then falling to 75 cents in November and rising again to an average of 101 cents in the first quarter of 1988.

The major factor behind the large increase in the price level was a drawdown in stocks. Reported commercial stocks of aluminum declined from the equivalent of roughly nine weeks of consumption at the end of 1984 to below five weeks at the end of 1987 (Table 61). The stock decline was largely the result of the closing of aluminum production capacity in Japan, the United States, and Europe in response to an extended period of low prices—in the 50 cent a pound range—at a time when world consumption continued to grow. World consumption rose by 2 percent in 1985, by over 3½ percent in 1986, and is estimated to have risen by roughly 3 percent in 1987. During 1987, with stocks already at low levels, stronger-than-expected demand led to a dramatic increase in prices as consumers attempted to bid for limited supplies.

Table 61.

Aluminum: World Commodity Balance, 1981–87

(In millions of tons)

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Source: World Metal Statistics (London: World Bureau of Metal Statistics), various issues in 1987.

Estimated by Commodities Division, IMF Research Department.

World production minus world consumption.

May not agree with production and consumption data because of differences in coverage.

Reported commercial stocks expressed as weeks of world consumption.

In 1987 consumption in the major aluminum consuming countries, apart from the Federal Republic of Germany, grew at a significantly higher rate than the underlying rate of growth of production in the aluminum consuming sectors of these economies. Aluminum consumption is estimated to have risen by nearly 10 percent in Japan and by 7 percent in both the United States and Italy. Although overall manufacturing production in Japan did not show much growth in 1987, policies to stimulate domestic demand contributed to strong demand for consumer goods and a very large increase in housing starts. Housing starts in 1987 were over 20 percent higher than in 1986. Growth in these sectors, which are important components of overall domestic demand, may have also stimulated capital spending by companies serving the domestic market. In the United States, overall manufacturing production and durable goods production each increased by roughly 4 percent, and consumer goods production increased by 3 percent. Housing starts, however, declined by almost 10 percent, and automobile production declined by about 6 percent. The 5 percent increase in consumption of aluminum was to some extent probably the result of an attempt by consumers to restock inventories through double ordering or other means, which increased demand only temporarily and which may not have been reflected in reported inventories. Increased aluminum consumption in Italy was associated with strong growth in the production of consumer goods and automobiles. An 8 percent drop in aluminum consumption in the Federal Republic of Germany can be explained by weak industrial growth and also by an 11 percent decline in housing starts in 1987.

In 1987 world production of bauxite grew by 3.6 percent, following a 2.6 percent increase in 1986. The largest increases were recorded by Brazil and Jamaica.81 Bauxite production in Brazil increased by about 10 percent in each year. In Jamaica the 22 percent rise in bauxite production in 1987, following a 13 percent increase in 1986, reversed the declining trend in production experienced over the previous ten years. The increase in Jamaica was within the framework of a plan to restore bauxite products to 9 million tons and was facilitated by sharply lower energy costs associated with the decline in oil prices.

During the 1980s the production of aluminum has tended to become more concentrated in the bauxite producing countries, in particular in Australia, Brazil, Indonesia, and Venezuela. An increase in vertical integration from bauxite to aluminum production has produced substantial savings resulting from reduced transportation costs and use of cheaper local sources of labor and electric power. This trend has meant that the share of world production accounted for by the United States, Japan, and Europe has declined, although the share of Canada in world production has increased.

After growing by 33 percent in 1986, aluminum production in Brazil remained unchanged 1987 because of a drought that affected the hydroelectric power supply to smelters and resulted in an increase in rates charged for electric power. In Canada the reactivation of idle capacity and the opening of new capacity resulted in a 16 percent increase in aluminum production in 1987. Similar factors were responsible for a 11 percent increase in Australian production during 1987. In the United States the reactivation of previously idled capacity was the major factor behind a production increase of almost 7 percent during the year.

Despite the increase in world production of aluminum in 1987, amounting to nearly 5 percent, the low level of aluminum stocks, combined with the unexpected strong demand in both Japan and the United States, created a tight market situation throughout the entire year. In addition, concern about a possible strike in Canada increased pressure on consumers to build inventories. This market tightness is expected to ease as additional supplies enter the market, and prices are expected to decline by late 1988.

Although there is a trend toward local processing of bauxite into alumina and aluminum, a large portion of bauxite still enters international trade. This is a reflection of the fact that many of the refineries are still located in industrial countries that do not have bauxite deposits. The major trade flows for bauxite are from Jamaica to mainly the United States and from Guinea to a large number of industrial countries. Australia and Brazil are also major exporters. Global earnings from exports of bauxite increased by 11 percent in terms of dollars in 1987, but remained unchanged in terms of SDRs (Table 62).

Table 62.

Aluminum: Export Earnings, 1984–87

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Sources: UN Conference on Trade and Development (UNCTAD), Yearbook of International Commodity Statistics, 1985 for exports; Commodities Division, IMF Research Department for market prices.

Data on exports are estimates of Commodities Division, IMF Research Department.

Actual weight.

London Metal Exchange, spot delivery, 99.5 percent aluminum, in the form of T-bars or ingots, c.i.f. European ports.

The significant growth in exports of aluminum since the early 1980s by Australia, Brazil, Indonesia, and Venezuela reflects the trend toward greater local processing. This trend is also evidenced by the increasing importance of imports of aluminum by a number of industrial countries. Japan has virtually shut down its aluminum smelting industry, and aluminum imports into Japan have almost tripled over the last ten years. Aluminum imports have more than doubled in the United States during the same period. Global dollar earnings from exports of aluminum in 1987 are estimated to have increased by over 40 percent, while the corresponding increase in terms of SDRs was nearly 30 percent.

Iron Ore

In 1987 iron ore prices increased marginally in terms of dollars, but fell by 8 percent in terms of SDRs.82 Despite an estimated increase in both world consumption and trade, the world iron ore industry continued to suffer from overcapacity, uncertainty regarding the impact of new projects, and generally declining demand for steel in the industrial countries.

The major determinant of the demand for iron ore has been the market for crude steel. Although world production of crude steel has been at roughly the same level for about a decade, production in the industrial countries has declined steadily from 395 million tons in 1977 (nearly 60 percent of world production) to 342 million tons by 1986 (less than 50 percent of world production). Production in the developing countries doubled during the same period, from approximately 46 million tons in 1977 (7 percent of world production) to 90 million tons in 1986 (13 percent of world production). In 1986 the industrial countries produced 25 percent of world iron ore output compared with 34 percent in 1977 and consumed only 38 percent of world iron ore output compared to 49 percent in 1977. In line with this trend, in 1986 and 1987 developing countries—in particular Brazil, India, and Venezuela—increased production of iron ore, while production of iron ore declined in such industrial countries as Australia, Canada, France, and the United States (Table 63).

Table 63.

Iron Ore: World Commodity Balance Together with Production of Pig Iron and Steel, 1981–87

(In millions of tons)

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Source: Statistics on Iron Ore, UN Conference on Trade and Development (UNCTAD), September 9, 1987.

Estimated by Commodities Division, IMF Research Department.

Production minus exports plus imports.

In the industrialized countries in 1986 only two thirds of steel capacity was utilized, one of the lowest rates of utilization in the last ten years. Crude steel production in these countries declined by 7 percent in 1986, and total apparent steel consumption fell by 3 percent, despite the fact that GDP growth in industrial countries was roughly 3 percent during 1986. In 1987, however, world steel production is estimated to have increased by roughly 2 percent. In Japan, crude steel production fell by almost 7 percent in 1986 and by an estimated 1 percent in 1987. Part of this decline is related to the sharp appreciation of the yen, which affected industrial activity in general, as evidenced by a 0.3 percent decline of industrial production during 1986 and an increase of only 1.3 percent estimated for 1987. In the Federal Republic of Germany, steel production declined by 8 percent in 1986 and by an estimated 4 percent for 1987. Overall growth in industrial production in Germany in 1986 and 1987 was low, registering only 1.2 percent in 1986 and an estimated decline of 0.8 percent in 1987. Roughly similar performance was evidenced in the manufacture of consumer goods, automobiles, and investment goods. After registering a 20 percent decline in 1985, housing starts in Germany declined by 3 percent in 1986 and by 11 percent in 1987. In the United States, crude steel production declined by 8 percent in 1986, while apparent iron ore consumption declined by 14 percent. The decline in the 1986 steel production in the United States was related to low growth (only 1 percent) in industrial production. The production of investment goods actually declined by 1.9 percent, and automobile production declined by 6.1 percent. For 1987, however, preliminary estimates indicate that both steel production and iron ore consumption increased by over 5 percent in the United States. Strong growth in steel production in 1987 was associated with an increase of over 3 percent in the production of manufactured goods and a 3 percent increase in production of consumer goods.

In the developing countries, apparent iron ore consumption increased by 11 percent in 1986 and is estimated to have increased by roughly 3 percent in 1987. Much of this increase occurred in the countries which have experienced large expansions in their steel production, notably Brazil, China, India, the Republic of Korea, and Venezuela. During the last ten years, Brazil has approximately doubled its steel production; Venezuela has almost quadrupled its production; India has increased steel production by roughly 50 percent; and Korea has increased steel production by a factor of 7. China has emerged a major iron ore importing country. In accordance with plans to dramatically expand its steel production, China has increasingly used imported high-grade ores rather than relying entirely on its own large reserves of low-grade ore.

Iron ore production in the developing countries rose by about 5 percent in 1986 and is estimated to have increased by 3.5 percent in 1987. The largest increases were in Brazil, India, and Venezuela. The start-up of the Carajas project in Brazil, has contributed to an almost 50 percent surge in Brazilian iron ore production since 1983. This project produces low-cost iron ore and is expected to have a sustained production of 35 million tons, or roughly 3 percent of world production. Although China is the largest producer of iron ore in Asia, because of the poor quality of its ore, it is not a major exporter; India, on the other hand, plays an important role as an export supplier, particularly to iron ore importing countries in Asia. Australia, the world’s second largest iron ore supplier produced 92 million tons, or 10 percent of world production in 1986. Although Australia has the potential to develop several additional high-quality deposits, market conditions for iron ore may not warrant significant expansion in the near term. Australia’s production has remained at roughly the same level during the last ten years. Although the capacity expansion by low-cost producers in developing countries has coincided with capacity reductions by higher-cost producers in the industrial countries, such as the United States, there remains a capacity overhang of about 20 percent in the world iron ore industry.

World trade in iron ore has been stagnant with the volume of exports in 1987 equal to the level in 1981 and 10 percent below the volume recorded in the peak year of 1974. Exports from the industrial countries have been on a declining trend. The volume of exports from these countries in 1986 was 14 percent below the volume in 1977. Exports by the developing countries, however, grew by 19 percent during the period from 1977 to 1986. Much of the increased trade has resulted from shipments from Brazil to Japan and the newly industrializing countries of Asia.

The excess capacity situation has dominated price determination in the market for iron ore. Although the dollar price of steel increased by 45 percent from the first quarter of 1987 to the first quarter of 1988, it is not clear that much of that increase will filter down to iron ore producers. With new capacity coming on stream and a continued need for rationalization by many of the high-cost producers, iron ore prices are not likely to recover substantially during the next few years.

Consistent with developments with respect to unit values and volumes, dollar export earnings from iron ore remained virtually unchanged from 1984 to 1987, while earnings expressed in terms of SDRs have declined by over 20 percent (Table 64). As a consequence of the change in market shares, earnings of developing countries have performed better in this period than earnings of industrial countries.

Table 64.

Iron Ore: Export Earnings, 1984–87

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Sources: UN Conference on Trade and Development (UNCTAD), Fourth Preparatory Meeting on Iron Ore, “Statistical Issues, Statistics on Iron Ore,” TD/B/IPC/Iron Ore/21 (September 9, 1987) for exports; Commodities Division, IMF Research Department for market prices.

Data on exports are estimates of Commodities Division, IMF Research Department.

Brazilian ore prices, c.i.f. German ports.

Tin

The tin market in 1986 and 1987 continued to be dominated by repercussions of the collapse in October of 1985 of price-support operations by the International Tin Council (ITC). The price fell from $5.62 a pound, just prior to the collapse, to about $2.55 a pound in July 1986, nine months later.83 Once it became clear, however, that the large stocks acquired by creditor banks following the cessation of ITC support operations were not being sold off rapidly, the tin price first stabilized, and then, toward the end of 1986, began to rise. The price was relatively stable in 1987, averaging about $3.16 a pound.

At the end of 1985, world commercial stocks of tin amounted to 73,000 tons, of which over 50,000 tons represented stocks that had been held by the buffer stock manager of the ITC. In addition, the U.S. strategic stockpile contained 188,000 tons of tin. The stocks of tin, even without taking account of the U.S. stockpile holdings, represented roughly one third of annual world consumption. In 1986, world refined production fell by 2 percent and in 1987 by a further 4 percent (Table 65). While this decline in production was small in relation to the decline in the market price, it did contribute to a reduction in stocks over this period, particularly as world production was below world consumption by 15 percent in 1987. Thus, despite augmented supplies as a result of sales of 8,000 tons from the U.S. strategic stockpile in 1986, commercial stocks were reduced to little more than 40,000 tons at the end of 1987.

Table 65.

Tin: World Commodity Balance, 1981–87

(In thousands of tons)

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Sources: World Metal Statistics (London: World Bureau of Metal Statistics), various issues in 1987, and CRU Metal Monitor: Tin (London: Commodities Research Unit Ltd.), December 1987.

Estimates of Commodities Division, IMF Research Department.

World production minus world consumption.

Total commercial stocks reported at end of period.

Some of the stocks held by ITC prior to the collapse of its market operations in October 1985 may not be included at the end of 1985 in the series of commercial stocks.

Commercial stocks measured as weeks of consumption.

ITC creditors acquired the ITC stocks following collapse of ITC market operations.

Apart from the reduction in stocks, an important factor contributing to the stability of tin prices in 1987 was the ability of the Association of Tin Producing Countries (ATPC)—Australia, Bolivia, Indonesia, Malaysia, Nigeria, Thailand, and Zaire—to devise a set of country quotas which limited total member exports to 96,000 tons for the 12-month period beginning April 1987. This tonnage was in line with the level of actual exports by these countries in 1986 and represented about 60 percent of world exports. In addition, during 1987, the major holders of tin inventories managed their stock disposal policies so as to protect tin prices.

The market’s ability to absorb the stock overhang has, nevertheless, been limited by a lack of growth in tin demand. Estimated consumption in 1987 was unchanged from the previous year. The lack of demand response to lower tin prices was the result of uncertainty surrounding the future direction of prices over the medium and long term, as well as lags in adjustment in the short terms. The tin price facing consumers in 1986 and 1987 may not have fully reflected the decline in spot prices since many tin plate producers were still working off higher price inventories and did not immediately reduce prices to reflect the new market conditions. In addition, before tin consumers make a long-term investment decision on whether to use tin plate rather than aluminum or plastic as a packaging material, they may want more certainty regarding long-term tin prices relative to those of its substitutes.

The tin price decline has had a major impact on the production of certain tin producers. In particular, Bolivian production declined by 27 percent in 1986 and by a further 45 percent in 1987. The decline in Bolivia was expected since it is a high-cost producer suffering from declining ore grades and a lack of investment for several years. This decline was also attributable in part to a restructuring of the state-owned mining company, COMIBOL. Malaysian output fell by 21 percent in 1986 because the effect of lower prices made certain operations unprofitable.84 Aided by the 31 percent devaluation of its currency in September of 1986, by a temporary reduction in costs by mining richer ore grades, and the beneficial effect of lower oil prices, Indonesian mine production, however, is estimated to have increased by 12 percent in 1987. After increasing by 62 percent in 1983,54 percent in 1984, and 35 percent in 1985, Brazilian tin mine production was relatively constant in 1986 and 1987, declining by 7 percent in 1986 and increasing by an estimated 4 percent in 1987. Brazil’s low production cost has permitted it to increase its market share from a negligible 3 percent in 1981 to 14 percent in 1987. China increased production by approximately 22 percent in 1986. This increase was, however, absorbed domestically by stock building or additional consumption, and exports from China declined during the year. While the decline in the stock overhang has brought the tin market into better balance, the modest improvement in tin prices in 1987 could generate additional production and exports from ATPC members or from non-ATPC members. The ATPC quota system has been effective to date because the quotas agreed for the period April 1987 to March 1988 were at or beyond capacity export levels for all of the countries except Malaysia, which is the world’s largest tin exporter and may have acted as a swing producer in an effort to stabilize prices.85 In the case of Bolivia, exports are expected to be far below its allocated quota. Preliminary indications, however, indicate that in 1987 China may have exported roughly twice the amount of tin it exported in 1986. A new quota scheme starting in March 1988 raised the overall ATPC quota to 101,900 tons and contains higher quotas for Malaysia and Indonesia.

Tin prices are expected to rise modestly in 1988 as slow growth in consumption permits further reductions in stocks. As prices continue to put pressure on higher cost suppliers to cut back production, lower cost producers should be able to increase market shares.

Earnings from exports of tin metal in 1986 and 1987 were little more than half the level in 1985 in terms of dollars and less than one half in terms of SDRs (Table 66). Because of a substantial increase in volume, earnings from exports of tin-in-concentrates fell by a much smaller amount in this period, but these concentrates still represent only about one quarter of total exports of tin.

Table 66.

Tin: Export Earnings, 1984–87

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Sources: UN Conference on Trade and Development (UNCTAD), Yearbook of International Commodity Statistics, 1985 for exports; Commodities Division, IMF Research Department for market prices.

Estimates of Commodities Division, IMF Research Department.

LME standard grade, spot delivery, c.i.f. European ports through October 1985; Metals Week, New York dealer price thereafter.

Nickel

The price of nickel increased sharply in 1987, rising from an average of 164 U.S. cents a pound in the fourth quarter of 1986 to 292 cents a pound in the fourth quarter of 1987.86 In March 1988, the price averaged a record 703 cents a pound.

From 1981 through 1986 the market for nickel was characterized by over-capacity in industrial countries and continuous reductions in operating costs, which generally were passed along to consumers of nickel through lower prices. In 1986 world nickel production, already below world consumption, declined by roughly 2 percent. World nickel consumption was unchanged from the previous year. A 20 percent decline in the dollar price of nickel in 1986 can be explained by the large increase, of almost 50 percent, in exports of nickel by the Soviet Union.

In 1987 an 8 percent increase in primary nickel consumption combined with an increase of only 2 percent in primary nickel production and tight scrap nickel supplies to decrease inventories by 11 percent (Table 67). Demand for stainless steel and nonferrous alloys grew rapidly in 1987 and, at least in the United States, the availability of stainless steel scrap was limited. At the beginning of the year, it was expected that Japanese stainless steel producers would suffer both from the strength of the yen and limited imports of stainless steel into the United States. Strong demand for stainless steel in the Republic of Korea, Singapore, and Taiwan Province of China, however, contributed to an increase of 4 percent in Japanese production of stainless steel. In the United States, the voluntary restraint agreement limiting imports, together with the fall in the value of the dollar, enabled U.S. stainless steel producers to benefit from an increase in domestic demand.

Table 67.

Nickel: World Commodity Balance, 1981–87

(In thousands of tons)

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Sources: World Metal Statistics (London: World Bureau of Metal Statistics), various issues in 1987, and CRU Metal Monitor: Nickel/Chrome/Molybdenum (London: Commodities Research Unit Ltd.), December 1987.

Estimated by Commodities Division, IMF Research Department.

World production minus world consumption.

Total commercial stocks measured at end of period.

May not agree with production and consumption data because of differences in coverage.

Commercial stocks measured as weeks of consumption.

Technical production problems in Canada and the U.S.S.R., two major nickel producing countries, resulted in a very tight nickel market in 1987, particularly in the second half of the year. The market response to the news of these difficulties resulted in consumers attempting to build inventories in anticipation of higher prices. Against this background, a reduction in nickel exports from the Dominican Republic beginning in December of 1987 brought succcessive and large month-to-month increases in prices through March 1988.

Unless the exceptionally rapid expansion in stainless steel production or supply problems continue, it is likely that nickel prices will drop sharply. With capacity utilization of roughly 80 percent, additional supplies should come on the market as long as prices remain above $3.00. Producers will be reluctant, however, to reopen properties closed in the early and mid-1980s unless they feel that high prices will be sustained for a considerable period.

Zinc

In comparison with the prices for aluminum, copper, and nickel, the price of zinc in 1987 was relatively stable. The market for zinc remains influenced by potential oversupply as a result of excess capacity that has not been closed. Expected production rationalization, especially in Europe, has been slow to occur. As a result, the price of zinc has been less affected by the low stock situation and supply disruptions that occurred in 1987 than were the prices of many other metals.

The price of zinc during the first quarter of 1987 fell from 36 U.S. cents a pound to 33 cents, but toward mid-year strengthened to nearly 40 cents a pound on account of a four-month strike affecting a major Canadian producer (COMINCO).87 The market response was limited because many consumers had sufficient stocks which enabled them to hold off purchases pending the settlement of the strike. There were, however, further shipment delays later in the year, with the result that following a decrease of prices in the third quarter, prices increased again to over 41 cents a pound by the first quarter of 1988.

In 1986 strong growth in zinc consumption in Europe and the United States contributed to an increase in world zinc consumption of 2.4 percent (Table 68). In 1987, however, the increase in world consumption fell to 1 percent. There are also indications that increases in consumption reported elsewhere may have been overstated because of a buildup of unreported consumer stocks. Nevertheless, there was strong consumption growth in a number of developing countries, in particular the newly industrializing countries of Asia, and this growth more than offset the declines in Europe and the United States.

Table 68.

Zinc: World Commodity Balance, 1981–87

(In thousands of metric tons)

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Sources: World Metal Statistics (London: World Bureau of Metal Statistics), various issues in 1987, and CRU Metal Monitor: Zinc (London: Commodities Research Unit Ltd.), December 1987.

Estimated by Commodities Division, IMF Research Department.

World production minus world consumption.

Total commercial stocks measured at end of period.

May not agree with production and consumption data because of differences in coverage.

Commercial stocks measured as weeks of consumption.

World mine production of zinc is estimated to have increased by over 6 percent in 1987 following a 1 percent decrease in 1986. This increase was mainly attributable to 20 percent growth in Canadian production, despite the strike action. Canadian slab zinc production in 1987, as in 1986, was adversely affected by strike action, however, and remained more than 15 percent below the level of production in 1985. Japanese production of slab zinc also fell sharply in 1986 and 1987. Nevertheless, although world production of slab zinc in 1986 was nearly 2 percent below the level of 1985, in 1987 a 4 percent increase in production was recorded, because large increases in European countries, in the Republic of Korea, and the United States more than offset the reductions in Canada and Japan.

In the near future, unless there are further supply disruptions or stronger-than-expected consumption growth, the pressure of excess capacity should lead to a fall in the price of zinc as the market goes into surplus and stocks increase to normal levels. Zinc prices are expected to decline from the 41 cent level recorded in the first quarter of 1988.

Lead

During 1987 the price of lead rose to its highest levels since 1981. The price increased by one third from the first to the second quarter of the year, and remained at about nearly 30 U.S. cents a pound through the first quarter of 1988.88 The improvement in the price of lead in 1987 was largely a reflection of earlier adjustments in the industry to the low price that had prevailed since 1982. In 1986 world mine production of lead declined by 4 percent, and refined lead production declined by 3 percent, while refined lead consumption increased by 1 percent (Table 69). This was the first year since 1979, in which the overall refined lead market was in deficit.

Table 69.

Lead: World Commodity Balance, 1981–87

(In thousands of tons)

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Sources: World Metal Statistics (London: World Bureau of Metal Statistics), various issues in 1987, and CRU Metal Monitor: Lead (London: Commodities Research Unit Ltd.), December 1987.

Estimated by Commodities Division, IMF Research Department.

World production minus world consumption.

Total commercial stocks measured at end-of-period.

May not agree with production and consumption data because of differences in coverage.

Commercial stocks measured as weeks of consumption.

The growth in consumption in 1986 was in large part a result of strong demand for batteries. The proportion of lead output used in the production of batteries has increased from roughly 50 percent at the beginning of 1980 to 60 percent because of reduced demand for lead in other uses, such as petroleum additives, pigments, cables, and alloys. The growth in demand for lead in batteries of roughly 2 percent a year has, however, helped keep the market stable. Part of the growth in battery demand was attributable to a general increase in automobile production, particularly in the newly industrializing nations, such as Brazil and the Republic of Korea.

The decline in mine production of lead in 1986 to a level similar to that in the late 1960s, was the result of the temporary and permanent mine closures mainly in Australia and the United States. Lower production of refined lead was attributable mainly to the closure of a major smelter in the United States that resulted in a 15 percent reduction in production and also to a 2 percent reduction in production in the U.S.S.R. Commercial lead stocks declined from 450,000 tons at the end of 1985 to 390,000 by the end of 1986, or from 4.3 weeks to 3.7 weeks of world consumption.

The rationalization of excess lead production capacity that occurred in 1986 and earlier years helped to tighten the market in 1987 with refined world consumption exceeding world production. With excess production no longer depressing prices, temporary work stoppages for maintenance and repair and on account of strikes created temporarily tight supply situations. The price increase in the second quarter of the year was triggered by a strike in Canada. Although the restructuring of the industry has led to the closure of much excess capacity, as higher prices provide an incentive to expand production, the run-down in stocks should be reversed. Lead prices are expected to weaken from levels experienced at the end of 1987, but to still remain significantly above their 1986 level.

In the period from 1982 to 1985 world trade in lead remained fairly stable. In 1986, however, exports as a percentage of consumption declined mainly because of a reduction, in response to low prices, in production and exports in Australia and Spain. The volume of world trade in lead is estimated to have increased in 1987 as a result of the increase in world consumption and the improved export performance of Australia and Spain.

Phosphate Rock

In spite of a continuation of low prices for food commodities that resulted in continued weak demand for fertilizer, and consequently for phosphate rock and other mineral ingredients used in fertilizer production, world production of phosphate rock in 1987 increased by 6 percent to 150 million tons. Phosphate rock production in the United States, the world’s largest producer and consumer of phosphatic fertilizers, rose by 5 percent to 41 million tons, although it is estimated that U.S. mines continued to operate at only 60 percent of capacity. Production in Morocco rose by 4 percent to 22 million tons.

Weak demand and increased phosphate rock production led to price declines. Morocco lowered its official export price for phosphate rock for calendar year 1987 to $31.00 a ton from $34.80.89 The unit value of phosphate rock exported by the United States fell to $21 a ton in 1987 from $27 a ton in 1986 (Table 70). The prices of some finished products, however, increased in 1987 as a result of supply adjustments associated with consolidation of operations and plant closures, particularly in the United States. Dollar prices for diammonium phosphate (DAP) and triple superphosphate (TSP) increased by 13 percent and 14 percent, respectively.

Table 70.

Phosphate Rock and Products: World Production, Exports, and Market Prices, 1980–87

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Sources: U.S. Bureau of Mines for U.S. production; International Fertilizer Industry Associated Ltd. for other production; Fertilizer Economic Studies Limited (FERTECON) for exports; Commodities Division, IMF Research Department for market prices.

Phosphoric acid, TSP, MAR, and DAP.

Average export unit value.

Weighted by relative values from 1983–85, based on export volumes and spot prices: phosphate rock, 35.6 percent; phosphoric acid, 20.5; DAP, 33.5; and TSP, 10.4.

IMF index of prices of food commodities.

The volume of world exports of phosphate rock in 1987 grew by less than 1 percent to over 45 million tons. World exports of phosphoric acid and other phosphatic products (TSP, DAP, and monoammonium phosphate (MAP)) measured in terms of their nutrient value increased by 13 percent to 11 million tons. The volume of U.S. exports of phosphate rock in 1987 increased by 14 percent and exports of phosphate products increased by 13 percent from the low levels recorded in 1986 for both rock and products. The volume of these exports in 1987, however, remained below the levels of 1984 and 1985. Morocco’s exports of rock declined by 4 percent in 1987, but exports of products increased by more than 25 percent. The shift toward greater exports of phosphate products relative to exports of phospate rock in recent years has reflected lower primary feedstock costs in countries producing phosphate rock and the comparative cost advantage of transporting finished fertilizers.

Until fertilizer demand recovers, there is little prospect for large increases in the price of phosphate rock. Morocco is expected to begin production of DAP in mid-1988, and this increased capacity should check any tendency for an upward movement in the price of this product.

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Cover World Economic and Financial Surveys, Primary Commodities, 1988
World Economic and Financial Surveys, Primary Commodities, 1988
Primary Commodities
ISBN:
9781451943085
ISSN:
0258-7440
Publication Date:
01 Jan 1988
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781451943085.083
Pages:
107
  • Chart 7.
    View in gallery
    Chart 7.

    Prices of Minerals and Metals, 1980–87

    (In SDRs; indices: 1980 = 100)

Chart 7.

Prices of Minerals and Metals, 1980–87

(In SDRs; indices: 1980 = 100)