Ever since evidence emerged late last year that the US might be about to slide into recession, debate has raged about the likely impact on global and particularly emerging markets’ growth.
Some investors saw an opportunity.
As base metals and ores are the commodities most sensitive to changes in economic activity – more so than crude oil, analysts say – traders decided to bet earlier this year that a slowdown in global demand would force the price of all sharply lower.
This has proved a bad call.
A spate of supply disruptions for copper, tin, aluminium, coal and iron ore has more than compensated for any consumption weakness, pushing their prices to record levels.
The rest of the complex – lead, nickel and zinc – have had a mixed performance after suffering only minor supply glitches.
The production difficulties have been particularly acute in the tin and copper markets, where miners and smelters have been plagued by labour strikes, power shortages, infrastructure constraints, government intervention and even heavy rains flooding several mines.
Tin prices on Wednesday surged to an all-time high of $24,000 a tonne, up 35 per cent so far this year, boosted by the Indonesian government’s attempts to clamp down on illegal mining, which is restricting supply of the metal used to solder electronic equipment.
Copper prices have surged 30 per cent so far this year – to a fresh record of $8,800 a tonne last week – while the price of aluminium has risen by 28 per cent so far this year to $3,100 a tonne, down from a peak of $3,255 in early March.
The cost of iron ore and coal has surged between 65 and 240 per cent in the last year as demand out of China has confounded pessimists and remained surprisingly robust
The supply disruptions are not a new phenomenon, having already afflicted the industry since 2000.
However, their intensity appears to have increased, helping to draw down inventories at the London Metal Exchange, the global market place for industrial metals.
Stephen Briggs, metals analyst at Société Générale in London, says the strength of base metals prices is not about demand nor about lack of new supply projects.
“The issue is that the industry is not producing what its supply targets on paper say,” Mr Briggs says.
He notes, for example, that global copper miners operated just below 87 per cent of their hypothetical capacity last year, the lowest level in about 25 years.
The low operating rate appears likely to continue this year as Codelco, the world’s largest copper producer, faces a number of strikes.
Striking subcontractors have shut Codelco’s Salvador and Andina mines for the past week while operations at the large El Teniente mine have also been disrupted by industrial action, although operations were on Wednesday slowly coming back on track.
John Reade, head of metals strategy at UBS in London, says the copper industry has produced less than expected for the last six years due to “project delays, wage strikes, falling ore grades, breakdowns, power shortages or sulphuric acid shortages”.
Mr Reade expects this year will be no different. “We forecast 800,000 tonnes of production disruption for 2008 and 2009, so we see no real improvement,” he says.
In South Africa, a severe shortage of power has led to problems for miners of platinum and ferro-chrome and that means the supply of these metals is likely to be less than analysts expected this year, pushing prices higher.
High-quality ferro-chrome prices last week hit an all-time high of $2.88 per pound, up from $0.7 per pound a year ago.
Heavy rain in the country has also led to the flooding of several mines, worsening the disruption and also causing a drop in production from South African coal mines.
In the Australian coal fields, bad weather has also meant that output has been hit.
A continuing shortage of rail and port capacity in Australia means that, even if companies can mine their coal, they are having problems exporting it, leading to even greater shortages.
Analysts say that, if companies can find enough rail wagons to take their coal to the ports, ships are forming long queues to be loaded as there is not enough room at the quayside.
Most mining analysts say that the mining industry is likely to keep running into further problems this year. Rebecca O’Dwyer, mining analyst at Investec in London, says: “The supply side disappointments should be large enough to cancel out any drop in demand.”
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