- International Monetary Fund
- Published Date:
- January 1986
This section contains analyses of market developments in recent years for the major metals in international trade: copper, iron ore, tin, and aluminum. Brief summaries are also provided for nickel, zinc, and lead.
As in the case of agricultural raw materials, the most important underlying factor determining year-to-year price movements for metals would appear to be the level of world economic activity. Rates of world inflation and supply factors play secondary roles. Metal prices tend to rise during extended periods of expansion in world economic activity and tend to fall during periods of economic slowdown. The very large increase in the U.S. dollar price index for metals of 42.8 percent in 1973 occurred at the same time as a 5.9 percent increase in the real GNP of the seven major industrial countries (Table 32); 1973 was the second successive year in which real GNP growth exceeded 5 percent. Despite the sharp fall in the growth of real GNP in 1974, the U.S. dollar price index for metals increased by 30.6 percent as a result of a sharp increase in world inflation and reduced production of metals. Nevertheless, in 1975 the effects of the 1975 world recession on prices of metals was felt, and the U.S. dollar index of metal prices fell by 12.2 percent. The next major price increase for metals occurred in 1979 following a period of relatively strong growth in world economic activity, high rates of world inflation, and rates of increase in production of metals, which were lower than in the early 1970s. Largely in response to the 1981-82 world economic recession, the U.S. dollar price index for metals fell by 25 percent over the two-year period 1981-82. Despite the resumption of growth in world economic activity in 1983, the price index for metals increased by only 4.9 percent in 1983 and fell by 5.5 percent in 1984. Contributing to the weakness in U.S. dollar prices of metals in this period were the low rates of inflation in industrial countries, the appreciation of the U.S. dollar, and a supply overhang resulting from larger production than consumption in both 1981 and 1982. The dollar index of prices of metals in 1985 is 30 percent below its 1980 level.
|Prices of Metals||Real GNP in Seven Industrial Countries||GNP Deflator (in U.S. dollars)||Supply of Metals1|
|Year||Nominal (in U.S. dollars)||Real2||Index of Production||Index of Stocks3||Index of Supply4|
|1985||-6.2||-6.6||2.7||2.3||-0.1||-11.5||-1.7|Chart 7.Prices of Metals, 1960-85
|Year||Copper1||Iron Ore2 (in U.S. dollars a ton)||Tin3||Aluminum4||Nickel5||Zinc6||Lead7||Phosphate Rock8 (in U.S. dollars a ton)|
Most international copper transactions take place at London Metal Exchange (LME) prices, or at prices based on LME prices. Because copper’s major end-uses are in cyclically sensitive industries (electronics, construction, and transporation), copper prices are particularly sensitive to the business cycle and hence can fluctuate considerably.
Historically, copper prices have followed a four-to-five year cycle, in line with changes in underlying supply-demand conditions. Periods of high prices have tended to last two years (1973-74,1979-80), but periods of low prices have tended to persist from about two to four years (1971-72, 1975-78, 1981-present). High average annual prices of 87 cents a pound in 1973-74 and 94 cents a pound in 1979-80 were followed by average annual prices of 60 cents a pound in 1975-78 and 70 cents a pound in 1981-84.46 Apparent spillovers of speculative funds from the precious metals markets seeking hedges against inflation contributed to the sharp price escalation in recent periods of high prices. On the other hand, while low copper prices in recent years have been mainly attributable to the underlying imbalance between supply and demand on the world copper market, these effects have been accentuated by the appreciation of the U.S. dollar, which has further depressed copper prices in terms of U.S. dollars.
The economic expansion in industrial countries beginning in 1983, taken in conjunction with the existence of large stocks and unutilized production capacity, has not yet been sufficient to provide a sustained increase in copper prices. An increase of 20 percent in the first five months of 1983 was more than offset by declines in the subsequent five months, as production rose, partly because of the reactivation of previously idled capacity, and the already high level of stocks continued to increase. In 1984, an 11 percent price increase from January to April was more than reversed in the next two months, and a similar spurt in prices from March 1985 to May 1985 was equally short-lived, despite significant declines in stocks during 1984 and the first half of 1985. The annual average price for 1984 of 62 cents a pound was 13 percent below the annual average price for 1983; prices in 1985 only increased by about 3 percent to average 64 cents a pound. The weakness in U.S. dollar prices of copper in 1985 is related to the marked strengthening of the dollar against other major currencies at a time of relatively low or declining rates of economic growth in these countries, weak demand in the United States as well as in Europe and Japan, continued lack of speculative interest in copper, as positive real rates of interest have increased the attractiveness of financial assets over metals and other tangible assets, and heavy cash selling of copper by traders in the wake of the suspension of tin trading on the LME on October 24. The perception of overcapacity in the industry also contributed to put pressure on prices in 1984-85.
After three consecutive years in which production exceeded consumption, in 1984 world copper consumption exceeded production, and stocks declined by about 29 percent (Table 34). In contrast to 1983, when refined copper production rose while consumption stagnated, production in 1984 declined by about 2 percent while consumption rose by over 10 percent. Most of the decline in output is attributable to Japan, where refined copper production was over 14 percent lower than in the previous year, partly because ores and concentrates formerly imported by Japan were diverted to new smelters in developing countries. The sharp upturn in consumption mainly reflected economic recovery in the United States, where rising automobile production and construction activity and strong demand from the electronics and business equipment industries contributed to a 15 percent increase in consumption, and in Japan, where consumption rose by 12 percent. U.S. imports of refined copper rose by over 4 percent, but this increase was more than offset by a 50 percent decline in unrefined imports. With the decline in Japan’s refined copper production, the rise in consumption required a sharp increase in that country’s refined copper imports, which rose by 147 percent, or from 190 thousand tons in 1983 to 470 thousand tons in 1984, the highest level in over two decades. Despite these developments, world copper exports declined in 1984, with the volume of refined and unrefined exports falling by 4 percent and 8 percent, respectively. Reflecting the fall in volumes combined with significantly lower prices, the value of refined and unrefined copper exports in 1984 declined sharply by 17 percent and 21 percent, respectively. About 70 percent of the decline in earnings from unrefined copper in the period 1980-84 and about 45 percent of the decline in earnings from refined copper is estimated to have been borne by the developing countries.
|Net trade with China and CMEA countries||41||58||47||-198||-18||-48|
|Strategic stockpile sales||36||3||5||—||—||—|
|Germany, Fed. Rep. of||748||748||731||737||792||728|
|Refined balance (supply minus consumption)||12||159||436||301||-362||-127|
|Closing stocks of refined copper3||1,035||1,133||1,640||1,667||1,191||1,060|
|Other U.S. stocks||(154)||(327)||(489)||(340)||(342)||(…)|
|London Metal Exchange||(123)||(127)||(253)||(436)||(126)||(188)|
|Other country stocks||(595)||(509)||(649)||(520)||(472)||(…)|
|Market prices (in U.S. cents a pound)4||99.1||79.0||67.2||72.2||62.5||64.3|
|Copper ore Volumes6||1,281||1,463||1,612||1,453||1,3017||9737|
|Unit values6 (in U.S. cents a pound)||82.9||65.4||51.8||54.6||47. V||47.17|
|Earnings (in millions of U.S. dollars)||2,340||2,110||1,840||1,750||1,3507||1,0107|
|Copper blister Volumes||732||766||828||784||7607||5607|
|Unit values8 (in U.S. cents a pound)||74.4||62.8||57.0||60.7||51.37||54.37|
|Earnings (in millions of U.S. dollars)||1,200||1,060||1,040||1,050||8607||6707|
|Refined copper Volume||3,339||2,943||3,052||3,380||3,2327||2,7817|
|Unit values8 (in U.S. cents a pound)||98.5||81.1||69.1||73.5||63.77||65.67|
|Earnings (in millions of U.S. dollars)||7,250||5,260||4,650||5,480||4,5407||4,0207|
In 1985, world copper consumption weakened but continued to exceed production, which is estimated to have declined slightly. Consumption is estimated to have fallen by about 4 percent, mainly reflecting slower economic growth in the industrial countries, particularly in the United States, where copper consumption in the industrial machinery and electrical sectors appears to have been depressed, and in Japan, partly reflecting weaker demand from the electrical power and construction sectors. The slight decline in production which accompanied the fall in consumption is mainly attributable to the United States, where financial losses stemming from low copper prices have resulted in a reduction in refined copper production in each year since 1981. As a result, refined copper production in the United States is estimated to have reached its lowest level since 1967. These developments and the estimated increase in net exports to China and the CMEA countries, are expected to be reflected in a lower level of world copper stocks at end-1985.
In 1986 and 1987, consumption is expected to increase slowly, based upon current prospects for world economic growth. This is expected to be accompanied by a modest expansion of production, with no substantial reactivation of capacity idled in earlier years, and a further drawdown in world stocks. Reflecting this, the outlook for a moderate increase in copper prices in 1986 is not unfavorable.
Aluminum is valued for its considerable conductive and structural properties relative to its weight, and is used mainly for vehicle panels, electric cables, residential siding, and packaging. The production of aluminum involves two separate operations: first, bauxite is mined and refined into alumina; and second, alumina is smelted into aluminum ingots. Aluminum is available commercially as ingots with a minimum aluminum content of 99.5 percent. Purer grades command higher prices. Ingots, molten aluminum, and aluminum scrap with alloying materials are transformed into mill products such as bars, rods, and wire. Aluminum has more applications in consumer products than other metals. Consequently, it benefited from the sharp upturn in consumer spending in 1983, especially in the United States, when the price for aluminum rebounded sharply from the trough of the 1981-82 recession.47 In 1984, however, consecutive declines were recorded in the aluminum price in each of the first nine months. In the ensuing two months, prices rose slightly, partly reflecting seasonal demand, but this price gain was largely offset by a decline in December. The average price for 1984 as a whole was 56.8 cents a pound, a decline of 13 percent from the comparable level of 1983. The price decline in 1984 was caused principally by a sharp increase in producer inventories resulting from excess production over consumption.
In 1984, world production of aluminum totaled 15.9 million tons, an increase of 11 percent compared with an annual average decline of about 5 percent during 1980-83 (Table 35). The sharp expansion in production in 1984 resulted from the premature reactivation of idle smelting capacity by producers, particularly in the United States, in response to the rising aluminum prices toward the end of 1983 and an increase in the capacity utilization rate from 78 percent in 1983 to 87 percent in 1984. Production rose by 21 percent to 4.1 million tons in the United States, the leading producer (26 percent of total production), with the capacity utilization rate rising from 58 percent in the last quarter of 1982 to 86 percent in the second quarter of 1984. Production by Australia rose from 0.5 million tons in 1983 to 0.8 million tons (5 percent of the total), an increase of 60 percent. The marked expansion in production in Australia was an outcome of the ongoing shift in the geographical pattern of aluminum production from regions with high energy costs to countries where low energy costs permit competitive pricing. In 1984, with the larger supply of primary aluminum, secondary (scrap) aluminum production declined marginally to 3.9 million tons.
|Mine production of bauxite||93.1||88.6||78.9||78.3||92.5||88.5|
|Production of alumina||28.1||26.6||22.2||23.4||27.1||25.4|
|Germany, Fed. Rep. of||0.7||0.7||0.7||0.7||0.8||0.7|
|Germany, Fed. Rep. of||1.0||1.0||1.0||1.1||1.2||1.2|
|Secondary (scrap) production||3.5||3.7||3.7||4.0||3.9||3.9|
|Market prices2 (in U.S. cents a pound)||80.5||57.3||45.0||65.2||56.8||47.2|
|Unit values5 (in U.S. cents a pound)||1.3||1.4||1.3||1.3||1.34||1.34|
|Earnings (in millions of U.S. dollars)||1,120||1,070||890||830||8004||7704|
|Unit values5 (in U.S. cents a pound)||18.1||19.9||19.3||17.4||15.14||12.64|
|Earnings (in millions of U.S. dollars)||3,150||3,250||2,690||2,610||2,2204||1,7804|
|Unit values5 (in U.S. cents a pound)||73.9||65.8||54.3||71.1||61.94||51.44|
|Earnings (in millions of U.S. dollars)||7,980||6,960||6,340||7,920||7,6404||6,1204|
In 1984, world consumption of aluminum grew by 3 percent to 15.8 million tons, the highest level achieved since 1979, although it fell short of production. The United States remained by far the largest individual consumer with 4.6 million tons (29 percent of total world consumption), followed by the U.S.S.R. with 1.8 million tons (11 percent), and by Japan with 1.7 million tons (11 percent). The excess production over consumption in 1984 led to a 27 percent rise in aluminum stocks to the equivalent of 3.1 months of consumption.
International trade in aluminum expanded gradually in recent years from an annual average of 5.3 million tons in 1981-83 to 5.6 million tons in 1984, partly reflecting the shift in the geographical location of production from the traditional consumers (the United States and Japan) to countries with low energy costs (Australia, New Zealand, and Venezuela).48 In 1984, major exporters were Canada, Norway, the Netherlands, the United States, and Venezuela, the combined exports of which totaled 2.6 million tons (46 percent of the total).
In 1985, market fundamentals improved somewhat; primary aluminum production was estimated to have declined by about 3 percent to 15.4 million tons, while primary aluminum consumption was estimated to have risen by about 1 percent to 16.0 million tons. The bulk of the production decline was accounted for by the United States and Europe where aluminum output fell by 12 percent and 6 percent, respectively, as a result of significant capacity shutdowns. Meanwhile strong production gains were registered in Australia and Latin America, with an acceleration in the shift in the location of aluminum production to areas of the world that offer cheap energy. Reflecting these developments in production and consumption, primary aluminum stocks fell by about 600 thousand tons to 2.4 million tons, equivalent to less than two months of consumption.
Despite the improvement in the demand-supply balance in the aluminum industry, aluminum prices, however, averaged only 47 cents a pound in 1985, a decline of about 17 percent over the comparable level of 1984. The price decline in 1985 reflected in part a fall in the industry’s per unit variable cost of aluminum production as a result of the closing of many older and high cost producers in the United States. Also, the adoption by many consumers of “just-in-time” inventory control procedures reduced their need to replenish their inventory holdings, thereby preventing the inventory decline from having a favorable effect on prices. In 1985, the volume of exports in aluminum also fell, notwithstanding the widening opportunities for trade afforded by continuing trends of smelter relocation away from the industrial countries and of more refining operations in ore-producing countries; North American imports declined in the wake of stagnant demand. This decline in export volume combined with the drop in aluminum prices reduced export earnings in U.S. dollars to the lowest level in the last five years.
In 1986, the trend of industry relocation to regions with low-cost energy resources is expected to continue. After the slow growth in 1985, demand for aluminum is expected to pick up some strength as the present rate of world economic growth is sustained. Consequently, aluminum prices are likely to register a significant rebound during the year.
Iron Ore is almost exclusively used for the production of primary iron—pig iron and sponge iron—which is the basic input for crude steel production. Only 2-3 percent of total iron ore consumption is used for other purposes, such as in manufacturing of cement, special high density concrete pigments, and magnetic concentrates. Demand for iron ore, therefore, is a derived demand, depending on the demand for steel.
In 1984, world consumption of iron rose after successive declines in 1980-83, while iron ore supplies rose after declining in the two preceding years. During the year, the price of iron ore49 continued to weaken, falling marginally to $23.1 a ton, the lowest since 1979. The price development in 1984 primarily reflected a supply-demand imbalance as well as the long-term trend of falling iron ore use per unit of crude steel. Nevertheless, the price in 1984 was only 15 percent below the record high 1980 price. In addition, the increasing strength of the U.S. dollar meant that while the dollar price of iron ore in 1984 declined, the price in terms of many other currencies increased, and this was a major factor contributing to the weakening of the demand of non-U.S. consumers. Price weakness in terms of dollars persisted in 1985. Iron ore prices averaged $22.6 a ton in 1985, which was about 2 percent lower than that for 1984. The major factor contributing to the price decline in 1985 continued to be excess supply of iron ore over demand.
After experiencing a cumulative decline of 18 percent over 1980-83, world production of iron ore rose by 11 percent to 813 million tons in 1984 (Table 36). The turnaround in iron ore production in 1984 was caused primarily by the strong recovery in world crude steel output, which grew by 7 percent to 710 million tons following a cumulative fall of 11 percent during 1980-83. In 1984, industrial countries accounted for 33 percent of world iron ore production as compared with 40 percent in 1972. Developing countries increased their share to 25 percent from 24 percent, and centrally planned economies increased their share to 42 percent from 36 percent. While the U.S.S.R. maintained its position as the world’s largest iron ore producer, production by Australia and Brazil rose rapidly in 1984, accelerating a shift in the geographical location of iron ore production away from the traditional steel-producing areas in North America, Western Europe, and the U.S.S.R.
|Production of iron ore||891.7||851.4||776.0||735.0||813.0||821.0|
|Apparent consumption of iron ore2||900.6||853.2||780.5||737.6||812.1||815.0|
|Germany, Fed. Rep. of||51.7||45.9||40.2||36.5||43.5||44.0|
|Production of pig iron||507.0||534.0||476.8||461.3||491.1||493.8|
|Production of crude steel||714.7||711.0||646.2||663.3||709.5||713.4|
|Market prices3 (in U.S. dollars a ton)||27.2||24.6||26.2||24.0||23.1||22.6|
|Exports of iron ore|
|Unit values5 (in U.S. dollars a ton)||18.9||20.4||21.3||20.5||18.5||18.14|
|Earnings (in millions of U.S. dollars)||7,140||7,370||6,900||6,230||6,670||6,5504|
In 1984, world consumption of iron ore was estimated to have increased by 10 percent, following a cumulative decline of nearly 18 percent over 1980-83. The rate of growth in iron ore consumption in 1984 was considerably larger than the rate of increase in crude steel output, temporarily reversing a trend, which was evident in the last two decades, of increasing efficiency in the use of iron ore per unit of steel output. The ratio of iron ore to crude steel output declined from 1.37 in 1960 to 1.11 in 1983, and rose to 1.14 in 1984. The decline in iron ore use relative to steel production, together with the large expansion in iron ore mining capacity that took place in the 1960s and in the early 1970s, led to the emergence of significant excess capacity in the iron ore industry in recent years. As a consequence, many new iron ore mining projects were cancelled or delayed, and no significant expansion in the production capacity took place in 1984.
In 1985, world iron ore production increased by about 1 percent, mostly reflecting the expansion in output in such developing countries as Brazil and Venezuela. Judging from the development in the steel industry, the demand for iron ore, however, appeared to have remained broadly unchanged over 1984; in 1985, world crude steel output rose by 0.6 percent over the level of the previous year, with a 5 percent decline in U.S. output more than offset by a strong growth of output in Brazil and Venezuela. The resulting supply-demand imbalance was a cause for the decline in spot iron ore prices of about 2 percent to $22.6 a ton in 1985; under long-term iron-ore contracts in 1985, an increase in iron ore prices of 1.57 percent in terms of U.S. dollars was agreed between Brazilian producers and German and Japanese buyers.
International trade in iron ore has expanded significantly in the last two decades, reflecting the shift in the location of iron ore production from the traditional steel producing regions to such countries as Australia, Brazil, India, Liberia, and Venezuela; the share of exports in total production increased from less than 30 percent in 1961 to 44 percent in 1979. The proportion of trade in total production, however, declined marginally to about 42 percent during 1980-83, principally reflecting the fall in iron ore consumption in industrial countries. In 1984, the long-term upward export trend resumed as the volume of exports rose by 18 percent to 360 million tons, accounting for 44 percent of total production. During the year, exports were dominated by six countries (Australia, Brazil, Canada, India, Sweden, and Liberia), which together accounted for about 74 percent of total exports. Brazil became the leading exporter, with shipments estimated at about 90 million tons (25 percent of the total). Exports by Australia, the former leader, were 86 million tons (24 percent). In 1985, the volume of exports increased further, but export earnings in U.S. dollars fell owing to a drop in iron ore prices.
In 1986, world iron ore production is expected to increase considerably, reflecting in part the planned increase in output of 15-20 million tons by Brazil’s Carojas mine. Some improvement in the demand for iron ore is also projected for 1986 on the basis of a projection of higher steel production for the year. These developments should lead to a modest nominal increase in iron ore prices over 1985.
As a result of the international recession, the price of tin on the LME fell from a peak price of 761 U.S. cents a pound in 1980 to 582 cents a pound in 1982.50 From mid-1982 through April 1983, expectations of an economic recovery led to a moderate upturn in prices, despite a continuing excess supply situation and a further build-up of stocks. But with the realization that underlying market conditions had not improved as expected and in view of the large overhang of stocks, the price of tin declined during the remainder of 1983 and throughout 1984. After reaching 625 cents a pound in April 1983, the LME price fell to an average of 579 cents a pound in the second half of 1983 and to 555 cents a pound on average in 1984. A low of 496 cents a pound was reached in February 1985. This price was below that prevailing in June 1982, just prior to the 1982-83 upturn. The price then recovered to 570 cents a pound in the third quarter of 1985, but declined to 562 cents a pound in October. Trading in tin on the LME was suspended from October 24 onward owing to the failure of the International Tin Council (ITC) to meet its financial obligations.
The price of tin on the Malaysian market, which is the indicator price for the Sixth International Tin Agreement (ITA),51 rose to Malaysian ringgit (M$)31.46 a kilogram (620 U.S. cents a pound) in April 1983 but fell to approximately M$30 a kilogram between May and November 1983 and then settled at or just above the floor price of the Agreement of M$29.15 a kilogram through March 1985. In that month the ITC empowered the buffer stock manager to operate below the floor price of the agreement in order to conserve the financial resources of the buffer stock, and the price in Kuala Lumpur slipped temporarily below the floor price in April and May 1985. As the price of tin in Malaysia was quite stable throughout 1984, the continuing decline of the tin price on the LME expressed in U.S. dollars largely reflected the appreciation of the U.S. dollar; equally, the subsequent price upturn in the second quarter of 1985 was largely attributable to the depreciation of the dollar. Trading on the Kuala Lumpur tin market was also halted on October 24, 1985 owing to the suspension of ITC buffer stock operations.
The situation of an excess of production over consumption for tin on world markets, which prevailed in 1978-82, continued in 1983. Although consumption of tin metal, which had declined sharply during the 1981-82 recession, stabilized at 154 thousand tons (Table 37), this was some 7 thousand tons less than forecast at the beginning of 1983. Production of tin metal declined by 22 thousand tons to 159 thousand tons as expected, largely reflecting the imposition of export controls on producing member countries of the ITA.52 Thus, for the year as a whole, total stocks of tin metal continued to rise, reaching 77 thousand tons at end-1983. Within the year, however, a turnaround in stocks occurred as consumption overtook production from August onward. The stock reduction continued in 1984 with annual consumption increasing by 7 percent to 165 thousand tons, and annual production growing by 1 percent to 161 thousand tons. By year-end, world stocks of tin metal had fallen to an estimated 70 thousand tons. By contrast, world stocks of tin-in-concentrates rose by an estimated 5 thousand tons during 1984 as mining operations in producing member countries of the ITA were not curtailed to the same extent as exports.
|ITC buffer stock||(—)||(2)||(53)||(55)||(62)||(…)4|
|Market prices5 (in U.S. cents a pound)||761||643||582||589||555||…6|
|Volumes (tin content)||34||28||25||30||307||327|
|Unit values8 (in U.S. cents a pound)||609||483||475||498||4707||4607|
|Earnings (in millions of U.S. dollars)||460||300||260||330||3107||3207|
|Unit values8 (in U.S. cents a pound)||743||617||586||567||5347||5217|
|Earnings (in millions of U.S. dollars)||2,920||2,540||1,990||1,840||1,5007||1,3807|
World production of tin metal increased further to an estimated 162 thousand tons in 1985, as stable or declining output in producing member countries of the ITC was more than offset by rising output in Brazil, China, and the United Kingdom. Smuggling of tin-in-concentrates from ITC members subject to export controls also remained at a high level. World consumption of tin metal in 1985 fell to an estimated 163 thousand tons as a result of the slowdown in economic activity in industrial countries during the year, and the long-term substitution of other materials for tin in the packaging industry. World stocks of tin metal are estimated to have declined marginally in 1985.
Owing to lower volumes and unit values, world export earnings from tin have fallen sharply during the 1980s. The combined value of world exports of tin metal and tin-in-concentrates, expressed in U.S. dollars, is estimated to have declined by 14 percent a year on average between 1980 and 1984 and by a further 6 percent in 1985. Reflecting the concentration of tin production in developing countries, the impact of this fall in export earnings has been felt most severely in these countries.
Notwithstanding the decline in total stocks of tin metal in 1984-85, the size of the ITC buffer stock rose by over 6 thousand tons between December 1983 and September 1984, reflecting increased net purchases by the buffer stock manager in defense of the floor price. At end-September 1985, the size of the buffer stock was 61,092 tons (of which 24,157 tons were held under the authority of the Fifth ITA), as compared with the maximum authorized size of the buffer stock of 63,823 tons. Owing to limited cash resources—cash contributions by members were used up early in the life of the Sixth ITA—these net purchases were financed by borrowings from commercial banks and by operations in the forward market. With market conditions deteriorating in 1985, the required scale of intervention increased, and the turnover in the buffer stock (mainly forward purchases and sales on the LME) rose from a quarterly average of 124 thousand tons in the first and second quarters to 215 thousand tons in the third quarter. The forward operations generated profits for the buffer stock so long as prices were rising, and the rising sterling price of tin associated with the depreciation of the U.K. pound against the U.S. dollar and the Malaysian ringgit led to substantial profits from the inception of the Agreement in mid-1982 through the first quarter of 1985. Thereafter, the fall in the sterling price of tin, caused by the appreciation of the pound sterling and larger quantities of tin coming onto the market, meant that losses were incurred on forward operations and that increasing amounts of tin were required to maintain the collateral for bank loans.
On October 23, 1985, more tin was offered on the LME than the buffer stock had the resources to purchase, and prices fell to the level which would commit virtually all the tin in the buffer stock as collateral for existing loans. With further bank borrowing no longer possible, buffer stock operations were suspended, and the LME tin market was closed on October 24. The liabilities of the ITC amounted to £281 million in loans outstanding from banks, and £625 million in loans and forward purchases from brokers, against which must be set the value of ITC assets, namely tin in the buffer stock and tin purchased forward. Various proposals for the settlement of the ITC’s outstanding obligations were put forward, but negotiations toward a settlement were terminated in early March 1986. The ITC and member governments have been sued by creditors, and legal actions are likely to extend over a long period. With the failure of the negotiations, the LME tin market was closed indefinitely, and the price of tin metal in other markets in March-April 1986 was in the range of 250-280 U.S. cents a pound.
Other Metals and Phosphate Rock
Nickel is used as an alloying element for plating on other metals or in chemical processes. About 65 percent of nickel’s intermediate uses are in the steel industry.
In 1984, the average LME price of nickel had strengthened moderately,53 reflecting a modest growth in nickel consumption in the stainless steel industry which led to a small decline in producer stocks; LME prices of nickel were still considerably below the levels attained in 1979-81. During 1984, world nickel smelter production rose by 8 percent to about 745 thousand tons, while primary nickel consumption grew by 15 percent to 780 thousand tons, the highest level since 1979. The year-end stocks fell by 19 percent to 156 thousand tons, equivalent to 2.4 months of consumption.
In 1985, the average price of nickel rose again, although market fundamentals deteriorated. During the year, nickel consumption was estimated to ha declined by about 12 percent to 686 thousand tons while nickel production remained broadly unchanged at the level of 1984. The decline in consumption was due mainly to a drop in nickel usage in the stainless steel industry, the main user of nickel, and an increase in the use of scrap by stainless steel mills. On the production side, world nickel production fell considerably in the first half of the year, primarily as a result of work stoppages in New Caledonia, which produces some 8 percent of the world’s nickel. With the drop in production, nickel stocks on metal exchanges also fell sharply during January-June 1985, generating concern over the adequacy of metal supplies in the metal market. This concern contributed to a rise in the LME nickel price from $2.24 a pound in January to $2.52 a pound in June. During the second half of the year, however, world nickel production accelerated, reflecting a return of normal operations in New Caledonia and a rapid growth of production in Australia and the Philippines. This acceleration in output largely offset the fall in production in the first half and contributed to a significant weakening of prices in the second half of the year. For the year on a whole, the LME average nickel price rose by about 3 percent to $2.22 a pound, primarily on the strength of the sharp rise in the first half of the year. Total nickel stocks at the end of 1985 were marginally smaller than a year earlier.
In 1986, market fundamentals are not expected to undergo substantial changes. Nickel production is forecast to increase moderately over 1985. At the current low price of nickel, the demand for nickel by the stainless steel sector is also likely to increase, with a consequent fall in the use of secondary nickel from scrap input. Mainly reflecting the stronger demand, the average LME nickel price is expected to register a moderate gain in 1986.
Zinc is used for galvanizing iron and steel to prevent corrosion; it is also used in die casting and brass products.
In 1984 zinc consumption rose for the second year in a row (by 3 percent after a rise of 6 percent in 1983),54 aided in part by the rapid growth of the production of galvanized building materials in Europe and the United States. The sustained growth in consumption reduced consumer inventories considerably, particularly in the early part of the year, and contributed to a 4 percent increase in refined output in 1984. Reflecting these developments in consumption, production, and inventories, zinc prices on LME rose sharply in the first quarter to reach a peak of 47.2 cents a pound in March, remained depressed during the summer, and rose strongly at year end; the average price for the year as a whole was 40.6 cents a pound, compared with 34.7 cents a pound for 1983.
Zinc prices continued to rise in the early months of 1985, reaching 41.2 cents a pound in March, aided by the coincidence of a large purchase by China and the stoppage of supplies from the largest Peruvian mine as a result of a labor dispute. Zinc prices weakened later in the year until December when they registered a short-lived recovery. For 1985 as a whole, refined zinc output was estimated to have increased by 2-3 percent, while consumption was estimated to have declined by 3-4 percent. These developments caused a decline of 20 percent in zinc prices in 1985. In 1986, zinc demand will remain weak because the growth of U.S. automobile and construction markets is likely to be slower than in 1985. Consequently, unless substantial mine closures occur during the year, zinc prices may not post any strong recovery.
Lead is used mostly for storage batteries and, to a declining extent, as a gasoline additive.
After reaching a peak of 54.6 cents a pound in 1979,55 LME lead prices declined during 1980-83 to 19.3 cents a pound in the latter year, owing primarily to excess supply. Prices, however, posted a relatively strong growth in 1984, largely reflecting the combination of a significant growth in consumption and a fall in production; the LME lead price averaged 20.0 cents a pound.
World lead consumption rose by 3 percent in 1984 to 5.4 million tons, the first significant growth in the last five years. In the United States, the major consumer, battery sales were relatively limited by mild weather, but consumption was boosted by strong new car sales and housing starts. Vehicle output was maintained at high levels in Germany and Japan, supported by their strong exports to the United States. Industrial investment was also buoyant in many industrial countries, strengthening the demand for lead. In contrast, world production of refined lead rose by only 1 percent in 1984 to 5.3 million tons, reflecting increases in Canada and Japan; production in the United States, which accounts for about 25 percent of the Western world’s total, declined owing mainly to protracted labor disputes. These developments led to a generally tight supply situation and to a 21 percent fall in lead inventories; LME stocks alone declined by 75 percent.
In 1985, lead prices weakened considerably to average 17.7 cents a pound, 12 percent below the average for 1984. The price weakness principally reflected the deterioration in the market balance resulting from reduced consumption, particularly an 11 percent decline in the United States. During the year, total refined output was estimated to have expanded by 4 percent, partly reflecting the return of production to a normal level in the United States.
In 1986, lead demand is expected to weaken further, partly on account of the implementation of new environmental regulations in industrial countries; in the United States, the permissible level of lead in gasoline was reduced from 1.1 grams per gallon to 0.5 grams from July 1, 1985 and further to 0.1 grams per gallon effective January 1, 1986. With sluggish demand, lead prices are expected to remain depressed in 1986, barring significant production cutbacks.
Phosphate rock is a primary commodity which accounts for roughly 1 percent of world trade in non-fuel primary commodities (2 percent of trade of the developing countries). The price of phosphate rock, in line with the prices of finished chemical fertilizers, has weakened considerably in world markets since 1981 owing to global recession, high interest rates, and bumper crops and low prices for most agricultural crops. The price of phosphate rock declined by 31 percent from $49.50 a ton in 1981 to $33.90 in 1985, while average food prices, declined by 23 percent over the same time period. World consumption of rock recovered from its depressed level of 124 million tons in 1982 to 149 million tons in 1984, while world production rose from 125 to 149 million tons over the same period. Production in 1985 is estimated to have increased to 154 million tons, which includes a rise in production in the United States, the largest world producer of rock, to 51 million tons compared with 49 million tons in the year before. Demand in the United States for rock used or sold domestically, or for export, however, is estimated to have declined by 12 percent to 37 million tons, while stocks are estimated to have increased by 34 percent to 16 million tons; U.S. mines are currently operating at about 60 percent of capacity. In addition to the current relative oversupply situation in fertilizers, the prices of those agricultural crops most dependent upon the use of fertilizer have weakened further in 1986 and are expected to continue to exert a depressing influence on the price of phosphate rock.