31/07/2012 - 09:16

Analysis: the unpleasant return of 'social metal'

31/07/2012 - 09:16


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High-speed swimmers at the Olympics are not the only Chinese-surprise confronting Australians. Western Australia’s all-important mining industry is being hit by another Chinese event -- reinvention of the oddly-named economic phenomenon, “social-metal”.

While that term has not been heard for most of the past 40 years it has started to surface in commentary on China’s metal processing industry which has been the major source of strong demand for Australian minerals.

What social metal means is that government interference in the market for minerals and metals creates an artificial price that has more to do with subsidies and cash hand-outs than the conventional forces of supply and demand.

The major practitioners of social metal in the 1970s were governments in South America which paid state-controlled mining companies to keep loss-making mines open as job creation projects, no matter what the price of the underlying metal, mainly copper.

Subsidised copper from Chile and Peru meant that the global market was over-supplied, piling pressure on an already depressed price.

The game in China today is not direct cash subsidies, but there have recently been a series of indications of government interference in the metals market, including cuts to government taxes on electricity production to aid loss-making (government controlled) aluminium smelters.

The principal Australian victims of Chinese support for its minerals industry are nickel and aluminium where low-cost metal made in China (coupled with low-cost ore imported from Indonesia) might soon force Australian miners to cut back, or close, as profits evaporate.

There are three other factors compounding the problem. They are:

  • Rapidly rising domestic costs in Australia, including higher government taxes, which are destroying export competitiveness.
  • The steady upward march in value of the Australian dollar, and
  • The European financial crisis which is killing industries in that region that have traditionally been major users of metals. 

South Africa’s platinum industry has been badly hit by a collapse in European demand for new cars, but miners in that country are under government pressure to maintain production rather than cut jobs in a country which already has a high rate of unemployment – another example of social metal.

In Australia, the problem is more to do with rising internal costs just as China helps its minerals industry, a twin-pronged process which could become the biggest threat to the mining boom on which government finances are based, and on which the rest of the economy depends.

Chinese government aid in its many forms also means that an event Australian miners had been hoping for is not happening, and that is the elimination of high-cost Chinese mines and metal-processing companies from the market.

In the past, many of China’s mines were viewed by Australians as “marginal cost producers”, meaning they would be the ones to drop out of the game when metal prices dipped beyond a certain level.

In nickel, the marginal cost was assumed to be around $US9 a pound, a price last seen in February, with Australian nickel miners grimly hanging on in the hope that someone else will blink first.

Ultra-low cost producers with high-grade orebodies can probably ride out the current downturn, but high-cost producers such as those processing low-grade, ore will be feeling the squeeze.

While nickel and aluminium are the metals being most closely watched the pressure on other Australian raw material exports is rising, causing some economists to re-visit the question of marginal cost.

Chinese iron ore producers, for example, have been widely expected to cut production as the price slips towards $US100 a tonne.

So far, there are no signs of Chinese iron ore cutbacks, perhaps an indication that the government is keen to see local mines stay open and might even be helping with subsidies such as cuts to the price of electricity and diesel fuel.

In a telling comment reported yesterday in London’s Financial Times newspaper a Deutsche Bank analysts, Daniel Brebner, said: “This is not a normal cycle. It’s a policy-driven cycle”.

Even more interesting was a report from China’s National Bureau of Statistics which said costs for iron ore mining in China had fallen by 7% in the first five months of 2012, a remarkable turn-around for an industry which has previously been suffering cost rises of 10 per cent a year, and more.

Social metal, and marginal cost of production, might be obscure terms to most people, but to Australia’s mining industry they are worrying factors at a time of rising internal taxes and other costs.


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