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Base metals surplus to remain

WITH leading economic indicators providing no indication of stabilisation in global activity over the next six months, surpluses will continue to accumulate in all base metals, according to Westpac economist Richard Franulovich.

“For the metals markets, the implications are clear cut. On our estimates, combined 2001 Western world demand for aluminium, copper and nickel is on track to post its sharpest reversal in 26 years,” he said.

DJ Carmichael analyst Peter Strachan believes significant cutbacks are likely to continue. He expects that, by the end of the year, all the hard decisions will have been be made and the closures and lay offs would have occurred.

He said the sooner this would occur the quicker the industry could recover.

Mr Strachan said the industry was always going to experience the high booms and busts because often the economic and social cost of closure was higher than continuing to produce. Producers often played the waiting game, hoping that one of their competitors would scale back production before they did, so that they could receive a greater slice of the market, he said.

Westpac research indicates that about a quarter of all metal producers are currently operating cash flow negative. Around 30 per cent of aluminium smelters are making cash losses at current prices, 65 per cent of zinc refiners are making loses, 35 per cent of nickel producers.

Benchmark cash prices received at the London Metals Exchange have fallen by more than 50 per cent for nickel, while aluminium prices have fallen by $US500 a tonne.

Trading volumes have also taken a battering, particularly for nickel, zinc and aluminium.

Counting in the sectors favour is that, while stock supplies have been increasing in the past six months, they have done so from a low base.

If the supply of base metals was cut off today, there would be enough stock to last the world 5.7 weeks. In 1993, stock levels would have lasted 12 weeks.

“That would suggest inventories can quickly return to historically low levels once global demand recovers. In the meantime, we do not expect a sustained reversal in inventory ratios to commence until mid-2002 at the earliest,” Mr Franulovich said.

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