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Base metal supply shortage

DESPITE the demand for base metals falling below levels experienced during the Asian financial crisis, a reduction in supply should ensure prices during the next six months remain higher than during those of the late 1990s.

According to a quarterly base metals outlook report by Westpac, commodity demand has declined much more dramatically than during the Asian crisis, but the price response has been very muted rela-tive to 1998-99.

“For example, aluminium and copper demands have now fallen 10 per cent from their mid-2000 peaks while nickel demand is down by a larger 15 per cent,” the report says.

That compares with only a 6 per cent decline for these metals during the Asian crisis.

“This is the first resources cycle in many where strong global demand in preceding years has not led to significant (over) investment in capacity (perhaps reflecting dimin-ished access to risk capital) in the major metals.

While the drop in demand for base metals in one factor behind the drop in production, it is not the only one.

High energy prices have meant energy-intensive commodities like aluminium and copper will be restrained for some time to come.

“The decline in metal availability since mid-2000 has virtually matched the collapse in demand, leaving the already low inventory positions of the base metals largely intact,” the report says. For aluminium, average annual growth in primary refined capacity is estimated at 2.4 per cent between 1998 and 2001, well down on the 3.1 per cent average growth rate in the preceding 1996-98 period.

For copper, the drop in production has been even more dramatic. In 1999-2001, capacity has grown just 2 per cent a year versus growth of 5.6 per cent/year in the 1996-98 period.

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