Mining bounces back.

Author:Morgan, M. J.
Position:Commodities
 
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After the collapse in prices from their precipitous highs in mid 2008, miners were left licking their wounds. There was little optimism as 2009 began. However, the first six months of the year showed a strong recovery and all the key commodities indexes are up around 20% on where they were in January.

Restocking by China, keen perhaps to diversify its holdings away from dollars, has accounted for a significant proportion of price rises. Chinese copper reserves now amount to around one million tonnes. This means that China is now importing less scrap and, additionally, the country is producing far more domestically than previously (some 4.78m tonnes in the first eight months of the year).

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Copper demand in the developing world is growing. There is likely to be a supply deficit for the next two years which can be expected to exert upward pressure on prices. The extent of economic recovery in the OECD nations may be mote of a factor in determining further price rises going forward. In the absence of extremely good, or bad news, many expect prices to recede slightly to around $4-5,000/tonne in 2010, despite having approached year end above $7,000/tonne. The more bullish precious metals consultancy GFMS thinks prices may top $7,500/tonne, even if the average is nearer $6,500/tonne.

The year's biggest story has been the seemingly inexorable rise of gold. Having started the year under $900/oz, it has thus far peaked at over $1,200. Whilst fundamental demand, such as for jewellery, remains very weak, uncertainty over the global economy and other asset classes, the risk of resurgent inflation due to money supply expansion as well as the weak dollar have provided plenty of momentum.

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The IMF still has 203.3mt of gold to sell and investors will be watching closely to see if the sale proceeds as smoothly as the first tranche of 200mt bought by India.

Those who last year who followed African Business's advice to consider purchasing platinum should also have made excellent returns; the rare metal opened the year below $1,000/ oz and is currently above $1,400/oz.

For the bold, we suggest looking at silver. It is overdue a rally, although it will not last--so one should not be too greedy. Fundamental demand is picking up, driven by new uses for the precious metal, and its relatively low ratio to gold should drive it rapidly higher.

Iron ore is likely to be relatively flat for 2010 but prices will respond swiftly if developed countries' economies pick up or if China's stalls.

As for the future, one factor that is worth taking note of is mining investment. Orders for mining equipment for this year appear to be well ahead of last year, suggesting a degree of optimism in the sector.

January

The benchmark index, the Thomson Reuters/Jefferies CRB Index, had fallen 54% from its record high in July by the middle of the month.

Zambia announced the scrapping of the windfall tax on mining companies from Its April.

Coup leader President Moussa Dadis Camara of Guinea announced a...

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