Base metal bright spots

The central importance of iron ore and copper to the major diversified miners, as well as the vast array of gold miners listed in London, sometimes means other commodities, including those that are closer to balancing, get overlooked. As the table below highlights, that shouldn’t be the case given how much they matter to the largest miners in London. Here we look at three base metals which are once again attracting investors’ attention.

Zinc oversupply corrected

The one metal to have beaten the price rises of all precious metals this year is zinc, and it’s been an enormous ascent. At the start of the year, prices were hovering at a six-year low yet had surged to within touching distance of a five-year high this month. There have been two key drivers behind this dramatic shift in the market. The first was a surge in Chinese demand sparked by last year’s 26 per cent collapse in prices. Seeing a good deal at the end of 2015 and needing to counter cuts lost through the closure of some high-cost domestic production, Chinese steelmakers’ imports of refined and raw zinc began to soar, buttressed by fiscal stimulus and an uptick in small car sales following a drop in the sales tax.

The second major reason behind the rise in zinc has been Glencore (GLEN), which at the same time made a deliberate attempt to take out the surplus. Last year, the commodities giant took a bold, costly decision to shut a third of its zinc output by suspending production at its Lady Loretta mine in Australia and Iscaycruz in Peru while reducing additional output in Australia and Kazakhstan. In turn, chief executive Ivan Glasenberg made a big bet to remove 500,000 tonnes from global markets – equivalent to around 3.5 per cent of production.

Now, some believe there is a looming shortage in the metal, which is most commonly used as a coating agent to protect steel from rusting. Researchers at Macquarie have speculated that heavy trading volumes originating in China could be a sign that domestic supply is contracting further, and that Chinese buyers are stockpiling zinc ahead of a surge in prices. What’s clearer is that Glencore’s decision to introduce a supply floor has been vindicated. That’s because what is left of its zinc portfolio is unique: the profitability of the mines’ gold by-products mean that the company could give away its zinc and make money. As it happens, costs are only expected to reach 18¢ a pound this year, against a current spot price floating just above $1.

Nickel in the balance

Nickel is another vital element in China’s stainless steel industry – and another key part of the Glencore jigsaw – but it is the Philippines that has been the most important player in the metal’s market this year. That’s because earlier this summer, newly enthroned president Rodrigo Duterte announced an environmental audit of the country’s mines, which resulted in a 10 per cent drop in national production. As the Philippines is the largest producer of the metal on earth, this led to a minor surge in global prices, which had already started to push ahead given the lack of incentives to mine the metal.

Years of overproduction have meant that vast quantities of nickel sit in warehouses, particularly in China, which thanks to its steel industry consumes the majority of global output. But Brazilian group Vale (VAL), the world’s largest single miner of nickel, believes these stockpiles should start to decline in the next few years, and predicts a deficit by the end of 2016. This could be tempered by a relaxation of the laws which saw Indonesia ban the export of metal ores in 2014, but with longer-term demand likely to track lithium and the long-trailed proliferation of electric vehicles, nickel is another commodity which should have bottomed. Investors keen for exposure should consider BHP Billiton (BLT) rather than Anglo American (AAL), whose Brazilian nickel assets are up for sale, although as the table below shows, none of the large diversified miners are significantly geared to the metal’s fortunes. Patient investors could instead consider Aim-listed junior miner Amur Minerals (AMC), whose Kun-Manie mine in Russia’s Far East has a resource of 726,000 tonnes of nickel and 206,400 tonnes of copper. However, while the company’s shares went on a rollercoaster ride last year after the Russian government approved the mining permit, it is a long way off from production and does not expect to complete its definitive feasibility study until the end of 2017.

Aluminium oversupply masks bright future

A few weeks ago we provided an update on the state of copper, which has been one of the only metals whose price has flatlined in 2016, owing to expectations that markets will remain oversupplied this year and next. And while the base metal is often taken as a yardstick of global economic health – given its widespread application in electronics, power generation and transmission – aluminium has often been a reliable secondary indicator given its use in transportation, packaging and power distribution. But while copper’s high conductivity and flexibility is likely to make it the choice metal in construction and electric circuitry, innovations in its cheaper counterpart mean that car manufacturers and the power sector are increasingly looking for ways to substitute copper for aluminium.

In theory, that should be great news for London-listed aluminium miners like Rio Tinto (RIO), which expects to produce 3.6m tonnes of the metal this year, and South32 (S32), whose output was 1m tonnes of aluminium and 5.3m tonnes of alumina in the year to May. Unfortunately, aluminium producers have found themselves dogged by similar issues facing many other miners – namely, the growth in Chinese makers’ capacity on an already oversupplied industry. The reason the country appears unafraid to add to production at such low prices is due to the construction of captive coal mines and power plants which run on subsidised power and are pushing Chinese production down the cost curve against traditional smelters.

Diversified miners' revenues by commodity