Posts Tagged ‘capacity’

The Economist: the wacky world of gold

June 2, 2011 Comments off

“Gold is not like other commodities. … Yet gold miners’ shares have failed to keep pace. This is new. Gold and gold-mining shares used to rise and fall in lockstep. Over the past five years, however, the price of gold has trebled while the value of gold miners has merely doubled. Investors in firms that shift, crush and process rocks are more grounded, it seems, than those who invest in bullion.

As mines age, extracting gold gets harder and costlier. Ores give up less of the metal—average grades have fallen by 30% since 1999 according to GFMS, a consultancy. And ore must be hauled up from ever greater depths. Fuel is pricier. So, too, are labour and equipment, since the global minerals boom has driven up demand for miners and drills.

Finding new seams to replace depleted ones is becoming harder. Metals Economics Group, a mining consultancy, estimates that in 2002 gold miners spent $500m on exploration. By 2008 they were spending $3 billion but finding much less. All the easy gold has been mined already.”

Source: The Economist, June 2 2011


  • The Economist identifies several reasons for the share price of gold mining companies to stay behind compared to the gold price: hedging limiting many miners benefits; increasing geopolitical risks; commodity diversification of gold miners; and the emergence of other methods to invest in gold.
  • The article mentions investment demand as the most important source of demand for gold. However, although this demand class is increasing in importance, demand for jewelry (mainly in India and China) still is the most important source of demand (see UBS-graphs below).


  • The Economist fails to realize the importance of the supply side impact on the gold price. Miners are not the only source of gold in the market. Over 25% of supply is ‘scrap gold’, recycled from either jewelry or devices. Furthermore, historically the sales of gold reserves by central banks has strongly impacted the gold price.
  • Another important aspect of the gold supply dynamics not mentioned in the article is the development time lag: from investing in the search for gold to producing the first gold will easily take 5-10 years. The boom in gold exploration triggered by the high gold prices is now starting to result in supply increases, with production exceeding the previous 2001 peak. If gold prices stay high, the world will certainly see a slow further capacity increase.

©2011 | Wilfred Visser |

China drives metal prices

November 25, 2010 Comments off

“China remains the biggest driver of base-metals demand and, hence, prices. Fiscal tightening later in the year will dampen demand for resources, putting a ceiling on prices. At the same time tight credit for Western producers will hamper their ability to expand capacity, limiting supply and supporting prices.”

Source: Economist, November 22 2010


  • The Economist identifies strengthened fiscal policy in China and credit shortage hampering capacity increases in the West as the most important drivers for metal prices in 2011.
  • Gold price is expected to rise approx. 10% and copper price approx. 7%, while aluminium price stays stable and steel price drops 17%.


  • It is unlikely that the credit shortage will have significant impact on the commodity prices in the short term. As capacity expansion projects typically have long lead times the availability of credit does not impact the available capacity in 2011 much.
  • Tax rate hikes in China are planned to limit the growth to ‘sustainable levels’, which could reduce the Chinese demand of construction materials significantly and reduce steel, copper and aluminium prices. However, even at moderate Chinese growth levels demand increases will force miners to add capacity.

©2010 | Wilfred Visser |

Alcoa: Aluminium demand will outstrip supply

November 18, 2010 1 comment

“Aluminium supplies will struggle to meet surging global demand over the next decade, leading to price rises, according to the head of Alcoa, the world’s largest producer of the metal.

Over the past 20 years, aluminium demand grew an average 3.4 per cent a year, made up of 15 per cent annual growth in China and 1 per cent in the rest of the world. Alcoa believes that over the next decade, even with slower demand in China, global demand can grow 6.5 per cent per year, doubling total use by 2020.

Later in the decade, he adds, it is likely to be increasingly difficult to find new high-quality mines to produce bauxite – aluminium ore – and sites for new refineries and smelters.

‘The constraint will not be capital – the money will be there – but the availability of these high-quality assets’ he says.”

Source: Financial Times, November 17 2010


  • Aluminium is growing in importance as building material and in parts for transportation because of the low weight characteristics. However, polymers and composites might become available as low cost substitutes, increasing the risk of aluminium investments in the long term.
  • Mr. Kleinfeld, Alcoa’s CEO, is one of the persons in the industry that is most active in commenting on capacity issues in the industry. Last year and early this year he warned for potential overcapacity in the short term, warning for undercapacity in the long term in his latest conversation with the Financial Times.


  • Timing of development is going to be the key to success in the bauxite mining industry. The competitive move of building production capacity early will discourage competitors to increase capacity in fear of overcapacity and low prices. However, increasing capacity too early might cause losses in early years of operation. Securing access to potential capacity will be the focus of business development in the next years.
  • The comments of mr. Kleinfeld can be seen in the light of the underperformance of Alcoa’s shareprice. Convincing investors of the long term prospects of the industry is crucial for the executives.

©2010 | Wilfred Visser |

Not all Chinese Cash Boosts Commodities

June 3, 2010 Comments off

“It is rarely a good idea to become overly reliant on one customer. Especially when that customer is trying to build a rival supply business of its own. China accounts for 36% or more of global demand for metals like copper, aluminum and zinc, according to Barclays Capital…

One big risk with a key customer is that its appetite wanes. Another, less obvious one, when it comes to China is its effect on the supply side.

China’s approach to dealing with its shortages of raw materials is ‘to throw money at it,’ says Jennifer Richmond at Stratfor, a global intelligence firm. Chinese firms have spent $79.6 billion acquiring foreign natural-resources producers since the start of 2008, according to Dealogic. Meanwhile, Beijing has struck deals from Russia to Africa offering loans and infrastructure development in exchange for minerals.”

Source: The Wall Street Journal, June 2 2010


  • Using various investment funds, banks and state-controlled companies, China has invested in building production capacity across the world. Not only in Africa, but also in Australia and Asia the Chinese are building a supply foothold.
  • WSJ’s Denning argues that the increase of production capacity caused by the Chinese investments will eventually lead to overcapacity and thus to decreasing commodity prices.


  • The potential oversupply created by Chinese investments is certainly a long term issue. Most investments in the mining industry do not lead to output in a period shorter than 5 years. Many things can happen to the demand in that period.
  • Apart from the need to build capacity to satisfy the demand increase, the surge in investments in exotic places is driven by the decreasing ore quality of the average new mine. Companies need to mine lower grade ores in more extreme places. As the investment required per ton of output increases, the investments will not necessarily increase supply at the same levels as demand. As long as China grows at 10% per year, it is going to be very hard to keep up in terms of production.

©2010 –

Steel Prices Under Pressure

June 1, 2010 Comments off

“The world’s steel mills are ramping up production so quickly that prices in some markets are expected to fall 5% or more in June, and inventories are growing.

Mills in China, the biggest driver of global steel prices, and Eastern Europe are churning out record amounts of steel. The surging output comes amid signs that the world’s economies may not be on a strong upswing, prompting worries that supply will outpace demand and restrain prices just as they were beginning to rise.

‘The possibility of overproduction in the market is a concern,’ said Lakshmi Mittal, chief executive of ArcelorMittal, the world’s largest steelmaker.

Annualized global steel output, based on a record April, is expected to climb to 1.5 billion metric tons from about 1.25 billion metric tons in 2009. At the forecast 2010 rate, output will exceed consumption of 1.3 billion metric tons, according to the World Steel Association.”

Source: Wall Street Journal, June 1 2010


  • According to the world steel association, capacity utilization of steel mills is up to 80%. The increased supply of steel is preceeding an increase in demand.
  • Economists warn for an iron ore price bubble (FT, May 31). Prices are rising much faster than mining costs in the past months.


  • For mining companies, the accelerated ramp-up of steel production is a positive development. Miners can ramp up production profitably quicker, and will thus be prepared for a potential new demand surge from China and India.
  • Oversupply might reduce steel prices in the short term and will dampen price increase in the medium term, but will quickly be forgotten if demand picks up as expected.

©2010 –

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