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Posts Tagged ‘trade’

China intensifies purchases of copper

September 1, 2011 Comments off

“Chinese companies and investors are stepping up their purchases of industrial commodities such as copper, in a show of confidence in the global economy that stands in contrast to the turmoil in western markets. The wave of buying is providing support for metals and minerals prices after commodities prices fell this month at worries about a double-dip. Senior executives at trading houses, mining companies and banks said Chinese consumers had used the recent drop in prices to rebuild stocks.

‘China is significantly less pessimistic relative to people in the western world,’ said Raymond Key, head of metals trading at Deutsche Bank. ‘On dips they are restocking, especially in copper.’ An executive at an important Chinese trading house added: ‘There is no doubt some traders have been buying [copper] recently.’”

Source: Financial Times, August 30 2011

Observations:

  • The global copper trade is transparent because of the unknown size of stocks at various points in the process, as indicated below. Especially the size of ‘bonded warehouse stocks’, which are often controlled by governments, can only be estimated.
  • Traders estimate the size of the government controlled bonded warehouse stocks to have halved over the past months, leading to a high demand for copper as stock have to be rebuilt.

Implications:

  • The copper trading chain shows the effect of the bull whip syndrome: small changes at the end of the chain result in large impact at the start because each player tries to anticipate the next moves. Copper price decreased as consumers were reducing stocks, trying to avoid buying on the top of the market. At the same time players all along the chain try to reduce stocks and inventory to minimize working capital. As soon as shortage of stocks forces consumers to start buying, prices shoot up because of a lack of reserves along the chain.
  • The Chinese State Reserve Bureau (SRB) holds large stocks in bonded warehouses, but it is unknown how large these stocks really are. The SRB can use these stocks to influence global prices and at the same time the metal stocks are used as a means to reduce holdings of foreign currencies by buying physical stocks. Overall the controlled stocks should be expected to reduce spikes in demand and supply, as a relatively stable copper price is important for China’s manufacturing industry.

©2011 | Wilfred Visser | thebusinessofmining.com

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Mining & Metals Scenarios to 2030

March 4, 2011 Comments off

How will the environment for the global mining and metals sector look in 2030?

Source: World Economic Forum, February 2010

Scenario Design:

  • The World Economic Forum described 3 plausible scenarios of the development of the industry up to 2030 with the objective of challenging the mental frameworks of regulators and people in the industry.
  • The scenarios build on the certainty of population growth and overall increasing demand for commodities.
  • The scenarios diverge in the area of 4 critical uncertain developments: geo-economic; geopolitical; economic; and environmental.

Scenario Outcomes:

  • The Green Trade Alliance scenario sees a world divided between the ‘green’ and ‘the rest’. Global trade is compromised by new environmental standards. Sustainability is a key issue for mining companies.
  • The Rebased Globalism scenario sees high growth in a Multipolar World, in which regulation is mainly local. Stakeholders management is a key issue for the mining industry, in which resources are scarce.
  • The Resource Security scenario sees a breakdown of globalism as governments try to secure access to raw materials. Limited trade and substitution of industrial inputs leads to low growth for the mining industry. Government relations are the most important asset in the industry.

©2011 | Wilfred Visser | thebusinessofmining.com

Vale denies iron ore price fixing accusations

June 2, 2010 Comments off

“Vale, the Brazilian iron ore miner, yesterday defended itself against Chinese accusations that its iron ore prices are too high, saying that supply and demand are fixing prices, not the big iron ore miners.

Roger Agnelli, Vale chief executive, told a press conference in Shanghai: ‘Vale is not fixing prices: who is fixing the prices is the market.

Steelmakers and Chinese officials have repeatedly complained about the concentration of power in the world iron ore market in the hands of three big producers, which also include Rio Tinto and BHP Billiton.

The dispute has ramifications for the global economy as iron ore prices feed through to steel prices, impacting the price of every-day goods.

Steelmakers were forced to accept a 90-100 per cent increase in iron ore prices in the second quarter after the annual benchmark system of pricing broke down.”

Source: Financial Times, June 2 2010

Observations:

  • Vale, Rio Tinto and BHP Billiton produce approx. 2/3 of exported (seaborne) iron ore. Vale is the largest of the 3 with 28% (240 m tonnes) of total exports.
  • Demand for iron ore is rather inelastic to price changes. Steel makers are generally willing and able to pass on price increases to end consumers.

Implications:

  • Due to the nature of the iron ore industry (homogeneous product, oligopolistic structure, strong ties among players) the threat of cartel forming is ever present. BHP Billiton, Rio Tinto and Vale will therefore need to be very carefull in their actions and will always need to be prepared to explain what they are doing.
  • Not only explicit price fixing (price levels agreed among producers), but also implicit price fixing (producers all understand it is in their best interest to keep price levels high and act on it) is punishable. It is certainly possible that a competition authority will find the iron ore producers guilty of implicit cartel forming.

©2010 – thebusinessofmining.com