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Chapter 7
Mineral Markets, Prices and the Recent
Performance of the Minerals and Energy Sector
Phillip Crowson
Market structure competitive markets
Market structure imperfect markets
Departing from the competitive model
Alternative pricing arrangements
The rise and fall of cartels
Producer pricing
Exchanges
The London Metal Exchange
Recent trends in mineral markets
The two preceding chapters examined first the diverse
influences on demand for mineral products, and
secondly the various forces acting on the supply side. In
essence prices are determined by the interaction of these
opposing forces in the market place. The geographical
location of demand, the end uses and the nature and
sources of supply differ for each product, and these
differences in market structure dictate precisely how
demand and supply interact to set the prices of individual
products. The nature of the pricing mechanism is strongly
influenced by the ease with which new suppliers can
enter the market, in other words by the barriers to entry.
In the short to medium term their level can be affected
by political, economic and social conditions in mineral
producing and consuming countries, but the main
factors are geological and technical. Where ore deposits
are readily discovered, and easily exploitable with
existing technology at prevailing price levels, the barriers
to entry are low. Conversely, a scarcity of exploitable
deposits keeps the barriers high. Changes in exploration
or extraction and processing technology can change the
conditions of entry.
MARKET STRUCTURE COMPETITIVE
MARKETS
Where the barriers to entry are low there is likely to
be a relatively large number of suppliers. The more
Mineral Economics
present and prospective suppliers there are, the more
competitive with each other they are likely to be. Price
in such competitive markets is determined by the free
interplay of supply and demand, and it will fluctuate
to the extent needed to clear the market. The demand
curve facing each individual supplier is to all intents
and purposes flat rather than downward sloping to the
right like the industrys demand curve. Producers are
price takers, and have little or no influence over the
prevailing price. They can, however, alter the amount
they supply to the market, and each supplier will
produce as much as possible as long as their cash costs
are fully covered.
Leaving aside the complications flowing from the
existence of inventories, other than normal working
stocks, prices will settle in the near term where demand
and supply intersect. Other things being equal, a rise in
demand or a fall in supply will prompt a rise in prices,
and a fall in demand or a rise in supply results in a fall
in prices until equilibrium is restored.
In practice, prices will tend to fluctuate around the
equilibrium level, because conditions are continuously
changing. Prices will gravitate towards the industrys
marginal cost of production; the cost of production
of the last, or most expensive, unit of supply from
whatever source that is required to balance the market.
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chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
The nature of the supply curve in competitive
markets, and of its interaction with demand and price,
is illustrated in Figure 7.1.
S individual suppliers product can readily substitute
D1
P1
D regional or global and there is hardly any after-sales
Price
P
D2
P2
S spread throughout the world, and no single producer
Q2 Q Q1
Quantity
Capacity
Fig 7.1 - Short-run supply and demand in competitive markets.
When prices are very low there is no supply, as
costs exceed prices. Higher prices allow producers
to cover their costs and enter the market until the
point is reached where supply is constrained by the
available productive capacity. Then no additional
supplies can be immediately forthcoming no matter
how high prices rise. It takes time for new capacity to
be developed, whether that comes from the expansion
of existing operations or from new facilities. The price
and the quantity supplied settle at the point where the
supply and demand curves intersect (P and Q when the
demand curve is D). If the demand curve rises to D1,
higher cost producers will be able to supply and the
price and quantity will rise to P1 and Q1. Conversely,
when demand drops back to D2, perhaps because of
economic recession or some technological change in
end-use markets, higher cost producers will be unable
to cover their costs, and both price and output will fall
to P2 and Q2 respectively.
This assumes that suppliers merely have regard to
near-term demand and prices. In practice their reactions
will be much more complex. If they believe that a price
fall is temporary they may be prepared to stockpile
rather than reduce their output, or to incur losses for
a period. The costs of closure, including the repayment
of debt, environmental remediation and redundancy
payments, may exceed the costs of continued operation.
Also, many suppliers may have more complex objectives
than short-term profit maximisation, and be prepared
to produce at a loss. Over the longer term, when the
constraint of existing capacity is lifted, the supply
curve will move to the right, with its level dictated by
technological change, by investment and by shifts in the
political and regulatory climate.
The major non-ferrous metals aluminium, copper,
lead, nickel, tin and zinc as well as gold and silver,
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are the mineral products whose markets most closely
approximate to the competitive model. They are typical
commodities, in the sense that the products of different
producers are reasonably homogeneous, and any
for that of another. There are many customers and a
variety of end uses, each with common standards and
specifications. Producers can exert little, or no, influence
over the markets for their products, which are usually
service, such as technical support, to give producers
extra leverage over consumers. Prices are uniform for
the standard grades, and the producers concentrate on
controlling their relative costs. There are many suppliers
can influence the level of prices, except for very short
periods. There are many ore deposits being exploited or
under development, it appears relatively easy to discover
new ones, secondary materials are readily available and
transport costs are generally low relative to product
prices. Information about recent and prospective trends
in supply and demand is rapidly and widely diffused,
and the markets are reasonably transparent.
That prices and volumes will settle at the unique
point where the demand and supply curves intersect
does not describe the actual process of price discovery,
except in an auction market where bids and offers are
made in public until a price is derived which just clears
the market. At that price all purchasers and suppliers
are satisfied. The method is basically similar for gold,
silver and the non-ferrous metals in that their prices are
settled in terminal markets. The characteristics of such
markets are explained in a later section of this chapter.
MARKET STRUCTURE IMPERFECT
MARKETS
Departing from the competitive model
The markets for most mineral products depart in
varying degrees from the competitive model. The
geological availability of many products is much more
limited than for non-ferrous metals or the technology
needed for their extraction and processing is far more
complex. The accessibility of ore deposits for commercial
mining may be restricted by a variety of political,
environmental or economic factors. For example,
many developing countries either totally prohibited
or severely circumscribed mineral developments by
privately-owned companies through much of the 1960
- 1990 period, especially where such companies were
foreign-owned. Many countries prevent the mining of
known ore deposits in national parks or wilderness
areas. Unstable political conditions increase the risks of
mineral exploration in many regions, but particularly in
Africa and parts of Asia, to unacceptable levels. These
various influences, either alone or in combination, raise
the barriers to entry and limit the number of producers.
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 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

As Table 7.1 illustrates, there are typically relatively but not the only one. Often there are also relatively few
few significant suppliers to the market for a wide range major users.
of minerals and their first stage products. It shows the Where there are only a few major producers the
shares of the largest firms in the global production of a suppliers do not have to take demand as given, and
range of mineral products, split between those that are their actions can have some influence on prices. Rather
traded in terminal markets, and those whose prices are than a demand curve that is flat, they face one sloping
fixed in other ways. downwards to the right, just like the industry. As
there are usually few suppliers the supply curve is
Table 7.1 likely to be stepped. Producers can exert some control,
Concentration in mineral markets: percentage shares of largest firms in world even if strictly limited, over the prices they receive by
production 2009 (source: Raw Materials Group, 2011). differentiating the characteristics of their products from
Leading firm Top 3 Top 5 Top 10 those of their competitors. In many instances there is
considerable competition in the non-price dimensions
Metals traded on terminal markets
of the product, such as technical service, or delivery
Aluminiuma 11 31 44 56 schedules. The chemical and physical characteristics of
Cobalt 15 37 50 68 the product are varied not just for particular end uses,
Copper 10 22 30 44 but often for individual users. There is a wide variation
Gold 10 23 31 43 in grades and specifications, which is reflected in
widely differing prices for apparently similar products.
Molybdenum 11 30 42 58
The costs of mining the raw ore are less important than
Nickel 19 39 51 69
its characteristics and the methods whereby it can be
Platinum 33 67 83 93 modified to serve the end uses that offer the highest
Silver 7 18 25 39 prices. Even producers of commodity metals and
Zinca 9 25 34 46 minerals look for ways to upgrade and differentiate
Negotiated, formula or list prices their products from those of their rivals in order to
achieve a premium over the basic market prices. Their
Alumina 12 35 51 68
objective, which is sometimes attained, is to create a
Bauxite 14 36 47 64 market for their own output that is distinct in some way
Chromite 20 41 52 64 from the market as a whole.
Copper mine 11 29 40 56 Where prices settle will clearly still depend on how
Diamond value 26 52 66 75 and where demand and supply intersect, no matter
Iron oreb 14 32 37 45 the precise structure of a products market. Since the
Lead mine a
6 18 23 32 costs of most suppliers are lowest at or near their
maximum possible output they will tend to produce to
Lithium 25 51 73 85
capacity. Without the safety valve of terminal markets,
Manganese 7 17 27 42 however, the costs of stockpiling excess supplies
Niobium 78 92 n.a n.a. usually force suppliers to reduce their offerings in
Phosphate rock 15 29 37 46 periods of weak market conditions. The short-run
Platinum 33 67 83 93 market conditions facing a representative producer
are shown in Figure7.2. The shapes of the demand and
Potash 18 46 66 91
supply (marginal cost) curves have been deliberately
Titanium minerals 23 49 66 80
exaggerated.
Uranium 16 45 67 84
Zinc mine a
10 22 31 44
Marginal
Zircon 19 40 49 57 Cost

a. Percentage shares of the leading firms are probably under-stated Average

P Cost
because the source does not cover most Chinese output, and China Above-normal
is a leading producer. profit
b. The three leading firms have a substantially greater share of Price Demand
seaborne trade in iron ore.

Platinum is shown in both groups, as most production

is sold direct by producers to users at list prices that lag Marginal
Revenue
terminal market prices. In recent years there has been
a trend towards a greater use of market-based pricing, Q
even in highly concentrated markets. The degree of Quantity
industry concentration is a major influence on pricing, Fig 7.2 - Short-run market equilibrium for a representative producer.

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chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
As the producer faces a downward sloping demand
curve for his output, the marginal revenue from
additional sales will also decline with increasing
output. Assuming that the producer aims to maximise
profits, he will produce to the level of output (Q) where
his marginal revenue equals his marginal cost of
production. The price (P) is rather higher than would be
set in a completely competitive market, and the producer
would earn above-normal profits. That is not a stable
position because such profits would induce a variety
of competitive responses. Exploration and new mine
development would be stimulated and technological
research on lower-cost processes encouraged. On
the demand side the use of substitutes would be
encouraged. In consequence, the demand curve facing
the representative producer would be pushed
downwards, lowering the level of output associated with
a given level of prices. Subject to the ease or difficulty
with which the barriers to entry could be surmounted,
the excess profits would eventually be eliminated by
competition, and the long-run equilibrium, shown in
Figure 7.3, would be attained. The achievement of that
equilibrium might take many years.
Marginal
Cost
P1
Price
Marginal
Revenue
Q1
Quantity
Fig 7.3 - Long-run market equilibrium for a representative producer.
The producer would still maximise profits at the
point where marginal cost equalled marginal revenue,
but with only a normal rate of profit. Also the level of
output would be rather lower than would be reached
in a perfectly competitive market, were that to exist in
the real world. As markets develop, and the number
and range of producers expand, prices drop towards
the marginal costs of production and any monopoly
profits are gradually whittled away. The theoretically
relevant marginal costs are those likely to pertain over
the long run. In other words, they will incorporate
the opportunity costs of capital of the facilities just
needed to meet expanding demand over the long
term. In practice prices tend to gravitate, at least in the
competitive markets, towards the cash break-even costs
of existing marginal producers. New entrants will aim
to have much lower cash costs than these, and to cover
their full costs at expected prices.
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Markets with but a few suppliers are described as
oligopolies, and those with only a few customers are
given the less common description of oligopsonies. In
many such markets there may be a penumbra of smaller
suppliers or users around the few large firms. Small
customers are liable to absorb an unduly large amount
of time and effort from the suppliers sales staff, and
they are often serviced through merchants, distributors,
or agents. Although small producers are unlikely to
produce a full range of products, their persistence in
selling their own grades can undermine established
price structures. Major suppliers of many non-metallic
minerals and minor metals, therefore, have to take full
account of their activities and potential actions. The
power of the major producers to control their markets
is accordingly circumscribed. In all cases each producer
has to take account of the possible impact of his own
decisions about pricing and production volume on his
competitors, and of their likely policies. How those
differ will partly depend on each producers relative
costs and available capacity.
In some instances the smaller producers may sell
through merchants, who may also acquire supplies
from other sources. These may include releases from
redundant government stockpiles, scrap and secondary
recovery, and in previous times imports from state
Average trading countries that were on the fringes of the global
Cost
market economy. Particularly when market conditions
are weak, merchants have been able to re-purchase
excess supplies from the customers of the major
Demand suppliers. Although the producers naturally discourage
resale of their products, they cannot always prevent it.
At the theoretical extreme of just one supplier, or
pure monopoly, the demand curves of the supplier and
the industry are the same. The monopolist can choose
that combination of price and volume that best suits
his objectives. Assuming that his objective is profit
maximisation he will produce to the point where his
marginal revenue equals his marginal cost. The short-
run position, shown in Figure 7.2, would hold for the
monopolist over the long run. In practice there are
no instances of natural total monopoly in the mineral
industries on a global scale, although there have been
cases of contrived monopoly through cartels and similar
collusive actions in restraint of trade. The availability
of secondary materials, and of substitutes of varying
degrees of effectiveness for most mineral products,
means that any individual suppliers power to raise
prices by holding back supplies is strictly limited.
That substitutes exist, and there are usually
competing suppliers to global markets, does not rule
out the probability of more restricted monopolies. The
key is the height of any barriers to entry. These can be
artificially raised for domestic producers in a national
market by protection against imports through tariffs
or quotas. Over the post war years there was a steady
trend in all major economies towards dismantling
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 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
quotas and other quantitative restrictions and lowering
tariff barriers on most products. That gradually eroded
local monopolies, often against the strong resistance of
the previously favoured suppliers. Some developing
countries still have highly protective tariffs against
imports, although there are continuing pressures for
their reduction. The cost of transport provides a less
penetrable barrier especially for bulk products with a
low value to weight ratio.
Thus the markets for sand and gravel remain largely
local, even in the United States (USA) and Western
Europe. For bulk products like coal and iron ore,
however, sharply declining costs of ocean shipping
during the decades following the Second World War
opened up local and national markets to international
competition. That had consequent repercussions on the
market structure and pricing of such products.
As demand for a product develops and expands from
its initial niche markets, new entrants are attracted over
the prevailing barriers to entry. The more suppliers
there are, the more difficult it becomes for anyone to
control, or even influence prices. In the initial stages of a
products life cycle there may be only a limited number
of uses, or perhaps only one. Users will be prepared to
pay high prices to satisfy their needs. The owners of the
more accessible deposits are able to generate monopoly
profits, especially where they also control innovative
processing technology. These profits naturally attract
the envious attentions of other companies, stimulating
both exploration and research into processes. Often
both are successful, and the initially high barriers to
entry are reduced.
New entrants can piggy-back off the marketing
activities of the initial pioneers. Capacity expands,
probably at a faster rate than demand, which remains
dependent on specialist uses. Sooner or later potential
supply exceeds demand, and prices come under
pressure. The initial producers will have probably
recouped their investment several times over and be
prepared to drop prices both to stimulate demand and
to choke off new entrants. Conversely, the latter may
be forced into price-cutting in order to gain market
share. Often they may be able to withstand lowered
prices because their deposits or processes are superior
to those of the pioneers. Normally production starts
at those deposits that are known or readily accessible,
rather than at those with the potentially lowest costs.
Followers building completely new facilities may be
able to exploit process improvements more easily than
the originators in their established plants.
Military needs in wartime have often forced large
increases in the capacity to produce many mineral
products and metals, often irrespective of profitability.
The physical need has been paramount. When military
demand has dropped producers have been forced
to develop new uses in order to keep their capacity
running, often through price reductions. Changing
Mineral Economics
technology has also been a driving force. In all cases
rapidly expanding markets have allowed producers to
exploit economies of scale.
Alternative pricing arrangements
The ways in which market prices, other than those fixed
in terminal markets, are actually determined varies
widely between different mineral products. Prices for
some are posted by producers, almost on a take-it-or-
leave-it basis. Such producer pricing, which is discussed
later in this chapter, was once much more widespread.
In effect the producer acts like a monopolist offering to
sell at a given price, with an implicit assumption that
output will be reduced to maintain that price when
market conditions are weak, and that some customers
may be unsatisfied when demand runs against the limits
of capacity. Other producers may voluntarily decide
to follow the lead set by the price-setting producer
and accept satisfactory rather than maximised profits.
In other instances producer pricing may be sustained
through collusive behaviour, ranging from informal
discussions to formal cartels. The recent history of
cartels is also described later in this chapter.
Where there are only a few major participants on
each side of the pricing equation, which applies to
many mineral products, prices are largely determined
by negotiation. Each participant has to take account
not only of the likely responses of the customer to his
actions, but also of the possible reactions of his existing
and potential competitors. Such intelligence is usually
more important for the producers than the purchasers.
Each mineral product effectively forms a small village
where all the major participants know each other. This
village-like nature of global mineral markets helps the
rapid transmission of gossip and information, and the
sense of prevailing market conditions, even where there
is no explicit market place.
How companies behave when negotiating prices
largely depends on the point reached in the business
cycle and on the strength of any barriers to entry. A
tougher negotiating stance is more appropriate when
markets are tightening than when they are in the
recessionary phase of the cycle. Where there are few, if
any, viable undeveloped ore deposits, where complex
proprietary technology is required in the production
process, where there is inadequate infrastructure for
accessing undeveloped deposits, or where there are
lengthy lead times and high capital costs involved in
opening up such deposits, the existing producers
bargaining power is strong. It weakens markedly where
there is ample existing and prospective capacity and
technology is readily available.
Thus, the differing availability of ore deposits has
historically favoured manganese producers over iron
ore producers in their dealings with the steel mills.
Neither had a very strong position, however, until their
markets tightened from the mid-2000s. In contrast, the
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chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
existing producers of titanium dioxide feedstock during
the 1980s and early 1990s benefited from high barriers
to entry. There were a limited number of deposits of
ilmenite suitable for upgrading at acceptable cost and
the proprietary processing technology was complex.
The producers market power was constrained by
the comparative strengths of a few large purchasers.
Mutual deterrence is as much a feature of some mineral
markets as of international relations.
Burgeoning demand for iron ore, relative to available
capacity from the mid-2000s, enabled iron ore producers
to force up prices dramatically, and then to insist on
more flexible pricing regimes that took much greater
account of spot prices that were leading contract prices.
The bargaining power of steel mills was too weak to
resist the leading iron ore producers demands in the
short to medium term, but steel producers have recently
been seeking alternative supplies, including backwards
integration into ore production. Eventually a new
equilibrium will be reached and the pricing power of
the leading iron ore producers will be weakened.
History suggests that price wars, once started, are
difficult to stop, and that they normally benefit only the
customers. Even that benefit may be strictly short-term
if lower prices inhibit investment in additional capacity
to meet growing demand. Much depends on whether
the major producers concentrate their attention on
maximising prices and profitability, or on volume.
The pursuit of market share is a common corporate
objective, on the assumption that it can enhance a
companys market power. It does not usually appear
to have been accompanied by long-term profitability
when it has been followed in the minerals industry. One
possible argument in favour of maximising volume,
even at the expense of weaker prices, is that it enables
a producer to achieve the designed economies of scale
from existing capacity. The structure of costs may be
such that the burden of fixed costs per unit of output
rises sharply when the mine and equipment are not
fully utilised. The gains from increasing the volume of
sales may more than outweigh any fall in prices.
Trade-offs like those are typical of the minerals
industry. Producers never look solely at one
dimension of their sales contracts but look at them
all simultaneously. Concessions on price may be set
against increased volume, but these are not the only
dimensions of sales. Quality, including such features as
the grade, and the physical and chemical composition
of the ore, is important, and is becoming increasingly
so. Quality involves far more than the ore itself. The
perceived reliability of a supplier, and its susceptibility
to strikes and other disruptions, is another aspect of
quality. The provision of technical service to customers
is not really important for the producers of metallic ores,
but it can be a valuable competitive tool for suppliers
of non-metallic minerals. The terms on which credit is
granted to purchasers, and the extent to which prices
84
may vary with the prices of the customers products are
also relevant, especially in the markets for base metals
concentrates.
In iron ore and coal, as in many other products,
pricing has evolved over the past 50 years. When
many exporting mines were first established trade was
mainly based on long-term contracts with prices fixed
over long periods, or indexed to general indicators
according to agreed formulae. Such contracts evolved
into shorter-term contracts with volumes covering
several years, but with periodic price negotiations.
Those are still the norm for many products. The
volumes can also vary within predetermined limits,
depending on market conditions. Negotiations do not
start from scratch every year, but from the prevailing
prices, which roll over until a new agreement is
reached. In some product markets, and especially in
industrial minerals, prices are negotiated for the life
of the contract, which may be for three to five years.
Provision may be made for prices to move over the
life of the contract in step with agreed indices, such
as US wholesale prices. When the contracts expire the
two parties will negotiate a new agreement taking into
account changes in the balance between supply and
demand, and the extent to which the expiring contract
favoured one side or the other. Very often one party will
be keen to offset any disadvantages it suffered during
the previous contract term. Normally agreement is
eventually reached because there is a mutual interest in
a continued relationship, but discussions occasionally
break up in acrimony, with the parties resorting to
arbitration.
The more frequent negotiation of prices tends to
prevent such disruptions since contract prices then move
more closely with market conditions. Sometimes prices
are changed half yearly or even quarterly, as in sulfur
and some fertiliser materials. Annual price negotiation
remains the general rule in base metals concentrates
and some coal markets, but with a tendency to more
frequent price changes.
Large producers of base metal concentrates may
divide their contractual volumes, even with one
customer, into blocks whose prices are negotiated at
different times. That softens the impact of any large
price movements resulting from any annual negotiating
round. The outcome of the annual bargaining naturally
depends on the relative strengths of the buyers and
sellers, but also on the changing objectives of individual
producers. The first major price settlement reached in
any annual bargaining round usually sets the tone for
the entire market, and other suppliers quickly follow.
The same supplier and customer may lead the market
for several years running, but the leadership often
changes. Published prices are normally only one facet
of a settlement, which also includes arrangements on
tonnage. The producer that settles first in a weak market
may have counterbalanced concessions on price by
increased sales volumes, but the followers seldom derive
Mineral Economics
 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
those benefits. Participants in the market have to weigh
up all the alternatives in their negotiating strategies.
Obviously they will need to take account of the size
of their own and their competitors inventories, and of
the balance between the capacity and output of each
producer. Eventually a global consensus about prices
is reached, and prices in the main regional markets are
closely linked. Sometimes such a consensus is reached
quickly, whereas in other years the negotiations can
drag on for months.
Annually negotiated benchmark pricing for seaborne
iron ore trade and for metallurgical coal broke down
in the late 2000s with the strong growth in Chinese
demand. Previously demand had been growing very
slowly and there was over-capacity. The major shippers
had faced well-organised users who could negotiate
on equal terms. With demand pushing against
capacity and the geographical diffusion of demand,
the suppliers relative bargaining power rose. Spot
prices increased sharply relative to annually negotiated
benchmark prices. The producers sought to keep pace
and pushed for more frequent price adjustments. The
benchmarking system finally collapsed in 2010 and it
has been superseded by quarterly or monthly prices,
based on measures of spot prices, mainly in the Chinese
market. This development has been accompanied by the
linking of contract prices to published index numbers,
over-the-counter (OTC) trading in iron ore swaps and
derivatives and the creation of standardised iron ore
and metallurgical coal contracts for futures trading.
THE RISE AND FALL OF CARTELS
Even where prices are negotiated between major
producers and users of a product there may be scope
for collusive action between producers. Smith (1776)
remarked on that inevitable tendency over two hundred
years ago:
People of the same trade seldom meet together, even
for merriment and diversion, but the conversation
ends in a conspiracy against the public, or in some
contrivance to raise prices.
The same factor that facilitates producer pricing,
namely a relatively limited number of producers, tends
to encourage restrictive agreements to limit output or
raise prices. The history of the minerals and metals
industry is littered with attempts to fix prices through
cooperative actions. These have met with varying
degrees of success, but most have ultimately failed.
Some have worked through producer pricing whilst
others have operated through terminal markets. Many,
but by no means all, were started in periods of over-
supply as defensive reactions to self-defeating price
cutting. Those were often introduced with the active
support, or at least implicit connivance, of governments.
Attitudes to cartels between producers are much
affected by prevailing political philosophies. During
the period between the First and Second World Wars,
Mineral Economics
many governments accepted the need for concerted
action to restrict output in conditions of acute excess
capacity and weak demand in order to sustain prices.
In the decades following the Second World War such
attitudes persisted, and they were reinforced by the
widespread acceptance of government intervention
and regulation of economic activity.
The Organisation of Petroleum Exporting Countries
(OPEC) was one of many producer-based organisations
established during this period. It was founded in 1960
by five countries Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela and a further eight oil producing countries
had joined by 1973. For the first decade of its existence
it achieved very little, but its members chipped away
at the power of the international oil companies, which
effectively controlled their production. Strongly rising
international demand for crude oil, partly driven by
the USA moving from a production surplus to a deficit,
enabled the producers to achieve moderate price
increases in 1971.
The Arab-Israeli war of October 1973 and its aftermath
encouraged OPEC to go much further in gaining control
of pricing and production. The move was driven by
political rather than economic considerations, as a
means of putting pressure on industrial countries. The
price of oil quadrupled, transforming the international
oil market and prompting serious economic dislocation
in the global economy. The Iranian revolution in 1979,
coupled with political upsets elsewhere, led to a further
round of sharp price rises from 1979 to 1980.
The initial price increases held because the short-
run demand for oil was highly price-inelastic, but by
the early 1980s alternative sources of oil were being
developed, partly under the stimulus of the higher prices
then ruling. Also there had been wholesale substitution
away from oil to alternative fuels and energy saving
measures of all types. By the late 1990s OPEC supplied
about two fifths of the global production of crude oil
compared with over three-quarters in the early 1970s
(see Figure 7.4). Although OPEC introduced formal
quotas on production in 1982 in order to sustain prices,
there was widespread cheating and crude oil prices
drifted downwards from the mid-1980s. The first Gulf
War in 1991 had but a temporary impact on oil prices.
By the late 1990s, global demand was again starting to
outstrip the available capacity to produce and OPECs
production quotas became more effective. The collapse
of Iraqi production in 2003 helped OPEC to sustain
crude oil prices. Most of the surviving members of OPEC
(Ecuador left in 1992, but rejoined in November 2007,
and Gabon left in 1995) are Islamic states with a similar
political outlook, although the similarities between a
theocratic Iran, a feudal monarchy like Saudi Arabia,
and Nigeria or Indonesia should not be overstated.
OPECs successes have sprung as much from the global
market conditions it has faced as from its own policies
85
chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

(A) million barrels/day from exploiting any power they might have had. In any
case, the basic economic conditions that allowed OPEC
90

to boost oil prices do not exist in most commodities.

80 OPEC Non-OPEC

70

60
There are several preconditions for successful cartel
action:
50

40
members should share some common interests and
30
objectives
20 there should not be a wide range of grades or
10 qualities of the product involved, but different
0 producers output should be closely substitutable;
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
the scope for cheating tends to vary inversely with
55
the homogeneity of the product
(B)
there should be a high level of concentration of
50
production and reserves
45 the cost structures of each producer should be
% share of world total

40
broadly comparable.
Where costs of production diverge widely there is
little community of interest between the lower-cost
35

30 and higher-cost producers. Similarly, a wide diversity

25
20
1965 1968 1971 1974 1977 1980
Fig 7.4 - (A) World crude oil production and OPECs share of world production
(source: British Petroleum, 2012 the data cover crude oil, shale oil, oil sands
and natural gas liquids); (B) OPECs percentage share of world oil production.
and actions. That was especially true in the late 2000s
when demand rose very strongly with rising global
economic activity and above all with surging Chinese
demand. Saudi Arabia, in particular, has been able to
raise or lower its output in order to influence prices,
whereas non-OPEC producers have generally lacked
that flexibility.
OPECs apparent success in raising crude oil prices
in the early 1970s prompted the formation of similar
international producer groups for a variety of mineral
products, such as phosphates, bauxite, iron ore,
mercury and tungsten. Less formal arrangements
covered manganese, lead and zinc. Many groups,
nominally at least, excluded any discussion of prices
from their agenda. The articles of the World Phosphate
Institute, for example, were framed in such a way as
to leave the three US company members free of any
anti-trust action. Australia only joined the bauxite
and iron ore associations on the understanding that
they would not attempt to increase prices unilaterally.
Nonetheless, the smoothing of price fluctuations was
always an important objective of most members of all
these producer groups, and of the copper producers
group, CIPEC, which was formed in 1967. Most were
inter-governmental bodies, although the phosphate,
mercury and tungsten organisations had individual
company members. Most lacked the wider common
interests, which created the strong cohesiveness of the
Arab members of OPEC. Weak market conditions from
1974 onwards prevented most producer associations
of sources of production, and of undeveloped reserves,
raises the prospect of new entrants undermining the
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 cartel. In essence the barriers to entry need to be fairly
high, and not just in the short run. There should be few
viable substitutes in the products major uses, and the
price-elasticity of demand should be very low.
Even during their heyday in the late 1970s, producer
associations, formed merely to increase or stabilise
prices, were unlikely to succeed, because some or all of
the necessary preconditions for success were lacking.
Table7.2 outlines the fate of several international
producer groups that were formed, or gained
prominence, during the 1970s.
Bauxite was perhaps the nearest parallel to petroleum
in the early 1970s, and producing countries such
as Jamaica raised their returns from local bauxite
production. That was a temporary success, however,
because there were ample alternative resources and
the barriers to entry were relatively low. The raising
of prices provided leeway for potential producers in
other countries, such as Brazil, to develop new mines.
Jamaicas share of global bauxite output fell from
around 18 per cent in 1973 - 1974 to eight per cent by
the mid-1980s.
Morocco and the other members of the putative
phosphate cartel were unsuccessful in sustaining their
price increases because farmers effectively went on strike
and delayed the application of phosphatic fertilisers.
Many of the inter-governmental producer groups that
were formed during the 1970s did not survive changes in
market conditions and prevailing political philosophies.
The International Bauxite Association, for example saw
a gradual loss of members, before collapsing in 1995.
In copper, CIPEC saw many members withdraw and it
contracted, leaving its residual coordinating functions
carried out in Chile.

86 Mineral Economics
 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

Table 7.2
International producer associations in the minerals industry.

International Bauxite Association (IBA)

Formed March 1974, and by 1975 members controlled 85 per cent of non-socialist world output. Jamaica, Surinam, Dominican Republic and Guinea successfully
Bauxite
raised bauxite mining taxes, but Australia did not. The countries that did lost market share, and the IBA became increasingly ineffective. Jamaica withdrew in
mid-1994 and the IBA collapsed in 1995.
Conseil Intergouvernmental des Pays Exportateurs de Cuivre (CIPEC)
Formed in June 1967 by Chile, Peru, Zaire and Zambia. Yugoslavia and Indonesia joined later, and Australia and Papua New Guinea became associates.
Copper In 1974-1976 CIPEC unsuccessfully tried to stabilise copper prices through production cuts, but its members controlled too small a share of the global market.
CIPEC dwindled in importance with the collapse of Central African copper production, the withdrawal of several members and the establishment of an
International Copper Study Group in 1993. Its residual coordinating functions moved to Chiles Copper Commission.
Association of Iron Ore Exporting Countries (APEF)
Developing country members pressed for attempts to set export prices in 1975, but Australia and Sweden refused. Neither Brazil nor Canada joined. APEF
Iron ore
collected statistics on market trends until its suspension in 1989. Its statistics gathering role was taken over by an UNCTAD trust fund, which now subcontracts
the work to the Raw Materials Group, a Stockholm-based consultancy.
World Phosphate Rock Institute
Morocco, the leading producer outside the USA, joined with Algeria, Brazil, Jordan, Senegal, Syria, Togo and Tunisia in 1973. Morocco sharply raised export prices
Phosphate rock
in 1974 and several other members followed suit. The United States export cartel, Phosrock, also raised its prices. The global market collapsed in 1975 when
the effects of recession were exacerbated by farmers ceasing to apply phosphatic fertilisers.
Mercury Producers Association (Assimer)
Formed in 1975 by Algeria, Turkey, Mexico, Italy, Spain and Yugoslavia. Most production was state-owned. In late-1977, Assimer announced attempts to control
the market, with sales restrictions followed by price increases. Its control was undermined in 1982 by falling consumption, increased secondary supplies and
Mercury
sales from US stockpiles, but was re-asserted for a brief period in the late 1980s. Growing concerns about the adverse impact of mercury on human health
and the environment have led to tighter regulations on consumption. These have also boosted recycling and greatly reduced any pricing power of the primary
producers.
UNCTAD Committee on Tungsten, Primary Tungsten Association and International Tungsten Industry Association
An ad hoc committee on Tungsten, an inter-governmental body, was established under the auspices of the United Nations in 1963. One of its tasks was to
examine ways of stabilising prices. In due course the committee and its various offshoots moved under the UNCTAD umbrella. Its main role was the collection
of statistics, but it also attempted to reach agreement on means of stabilising the market, especially during the late 1970s. It was complemented by a producer
Tungsten
organisation, the Primary Tungsten Association (PTA), established by major producing companies in 1976. With changing attitudes to market intervention
the UNCTAD committee was replaced in October 1992 by the Intergovernmental Group of Experts on Tungsten, whose remit was solely statistical. The PTA was
replaced by the International Tungsten Industry Association in early 1988. This brought together mining companies, processors, consumers and traders in a
research organisation under Belgian law.

Even if the necessary preconditions for cartels had
been in place, the marked change in global political
conditions that gathered force during the 1980s would
have made their lives difficult. The emphasis moved
from collective to individual action and to the primacy
of market forces, and government intervention became
unfashionable. Prices should be allowed to find their
own levels in response to competitive forces, which
should be facilitated by effective competition policies.
A major defect of producer cartels is that they do not
explicitly take account of the interests of consumers.
Governments of commodity-consuming countries
are, therefore, wary of their creation, especially where
companies rather than governments are involved. Both
the USA and the European Union came out strongly
against any effective cartels, whether these were
organised by individual producing companies, private-
or state-owned, or by governments. This opposition
was less than total, however, as the USA has explicitly
allowed cartels that enable US exporters to compete
internationally. Thus, US exporters of phosphates and
soda ash combine to sell in overseas markets. Similarly,
Canadian producers of potash export collectively
through Canpotex. Joint purchasing arrangements
amongst consuming companies are also acceptable.
Examples include the Japanese smelter pool, which
arranges imports of copper concentrates, and joint
purchasing by both the Japanese and the German steel
mills. One company may take the lead in dealings with
producers, with the ensuing agreement shared by all.
Joint purchasing can tip the scales in the purchasers
favour, even where they have an apparently weak
initial bargaining position.
Until the mid-1970s only the USA had strong anti-
trust legislation and non-US companies were prepared
to collude to maintain prices. The important proviso
was that such collusion did not affect USA commerce.
Otherwise it would have brought those involved under
the reach of the extra-territorial provisions of the USA
anti-trust laws. It was reasonable to assume that prod-
ucer pricing outside the USA was beyond reach as long
as the USA was self-sufficient in the affected products.
Imports into the USA of many minerals and metals
began rising strongly in the early 1970s; however, for a
variety of different, usually specific, reasons. That led the
US Department of Justice to examine possible breaches
of anti-trust laws by foreign companies. Simultaneously
the European Unions competition policy was being
developed and enforced through case law.

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chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
International zinc producers were amongst the first
to experience the changed climate. Companies who
had established and maintained the well-publicised
European Producer Price system for zinc from
1964 onwards, with the tacit approval of their host
governments, were questioned by the US anti-trust
authorities in 1976 and a case was brought against
them by the European Competition Directorate. That
eventually resulted in fines and the effective collapse
of the system of zinc producer prices, which had been
enforced through an agreement to stockpile, intervene
on the London Metal Exchange (LME) and reduce
output when necessary. The vestiges of the system
lingered on for some years, but without its previous
effectiveness. Even when it was fully operational
those involved had been quite prepared to cheat their
colleagues if they could. Also during the late 1970s
the European Competition Directorate successfully
prosecuted a group of companies that had collectively
purchased all exports of aluminium from eastern
countries in order to keep it off the LME and damage
the prevailing producer price structure.
These actions, and others in different industries, made
suppliers of minerals and metals into North America
and the European Union much more careful about the
anti-trust rules. For example, the major aluminium
producers took great pains to involve governments in
ways of tackling the problems raised by the sudden
and unexpected outflow of aluminium metal from the
former Soviet Union in the late 1980s and early 1990s.
The Memorandum of Understanding signed between
Russia and certain major aluminium-producing
countries in early 1994 was an intergovernmental
agreement. It provided a fig leaf behind which the
companies could shelter when they cut their output in
order to restore market balance. Those cuts coincided
with an influx of speculative funds into purchasing
non-ferrous metals, especially aluminium. Prices rose
sharply during 1994 by far more than anyone had
forecast, and some aggrieved users of aluminium
attempted to sue the US producers for anti-trust
violations.
The diamond market provides the longest running
example of a price setting cartel that has been treated as
unlawful in the USA. For many years De Beers operated
an effective cartel amongst the mining countries and
controlled market prices through its sales policies,
and by stockpiling. The US anti-trust authorities were
strongly antagonistic and would have prosecuted both
the company and its officers had they ever been within
US jurisdiction. That was not, however, a sufficient
impediment, notwithstanding the considerable funds
that had to be raised to finance stocks during periods
of weak demand such as the early 1980s and early
1990s. The collapse of the Soviet Union in 1991 and the
development of new mines outside De Beers control
weakened its influence. Australian production, mainly
88
of industrial diamonds, began in the early 1980s, and
the Australian producers became increasingly assertive
towards de Beers Central Selling Organisation.
Gradually its tight grip on global diamond marketing
weakened, especially with the start-up of Canadian
production in 2001. A considerable degree of market
discipline remains, however, largely because of the
nature of the market for diamond gems. Consumers,
have an interest in maintaining high prices for a
product that is purchased as a status object rather than
for its intrinsic properties in use. If the global diamond
market is cartelised, it is a cartel in which consumers
are as guilty of conspiring as producers. That makes
diamonds very much a special case. Even in diamonds,
a form of producer pricing does not eliminate the need
for careful analysis of market trends, for a willingness
to stockpile, or for a need for production cut-backs in
periods of weak demand.
Notwithstanding strong anti-trust legislation in major
minerals-consuming countries, collusive actions to
restrict competition persist. In 2003, for example, the
European Union fined European producers of copper
tube for price fixing. It also began an investigation,
with the relevant Canadian and US agencies, into the
copper concentrate market. There were suggestions
that meetings to discuss market conditions and
industry statistics provided a front for price-fixing.
The investigations were closed in 2005 without any
adverse findings. More recently the European Union
has taken action against European steel companies for
price fixing. It has also shown concern about the market
for seaborne iron ore in its investigations of actual or
potential mergers between producing companies.
The nature of the markets for minerals and their first-
stage products means that producers will always seek
ways of restricting competition. The search inevitably
intensifies during prolonged periods of weak market
conditions. Most collusive agreements are likely to
prove temporary because demand is not sufficiently
price inelastic over the medium to long term, and
because the barriers to entry are not high enough.
PRODUCER PRICING
Collusive action of any type is not an essential
prerequisite of producer pricing. Where there are
only a few suppliers to a market, but many end-uses
and customers, producers may quote list prices. Such
producer prices may be set by a dominant producer,
or price leader, and followed fairly closely by the other
suppliers. They may have similar cost structures, and
have learned from bitter experience that vigorous price
competition brings only temporary gains in market
share that are usually whittled away in the next round of
price cuts, to the benefit of users rather than producers.
Concentration on the other competitive dimensions,
such as product quality, marketing, or technical service,
may be more effective means of attracting and retaining
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 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
customers. Such a concentration is common in the
markets for many non-metallic minerals, regardless of
the pricing methods used.
Where producers set prices they tend to keep them
fixed for long periods. They often set them not by
reference to marginal costs, whether their own, or
those of the industry, but to some form of average cost.
Prices change in response to clear external stimuli, like
movements in the costs of major raw materials such
as crude oil. They are also responsive to their setters
financial needs, and to changes in productive capacity,
which often go together.
Customers claim to like producer prices because of
their apparent stability, and their air of predictability.
Their infrequent changes enable consumers to
plan ahead with confidence especially where their
purchasing is subject to annual cash budgeting. That
has been the typical pattern not just for state-owned
companies and government departments, but also for
major purchasers such as automobile producers. In the
immediate post-war decades, most minerals and metals
were priced by producers, and true market-related
pricing was relatively rare.
The stability of producer pricing was, and is, more
apparent than real. It is impossible to maintain complete
control over both prices and the volume purchased,
except under total monopoly. No matter how clever the
forecasters, there are always unexpected changes in the
balance between supply and demand. Stable prices are
only realised where suppliers are prepared to reduce
their offerings when markets are over-supplied, and
to expand their offerings rapidly in times of shortage.
That, in turn, means a willingness to stockpile and
even reduce production in weak markets, and to raise
output rapidly in the boom. This implies that there will
be a degree of over-capacity throughout most phases
of the business cycle, which, in turn, means that really
effective producer pricing is only achievable in those
markets where there are only a few strong companies.
High barriers to entry into the market and a perceived
community of interest in price stability between the
suppliers are usually preconditions for success.
Producer pricing has been strongest and most
tenacious in national or regional markets that are
protected in some manner from major imports. The
basic cost structures of producers within one country
may differ, but they are subject to similar variations
in costs and demand, and to a common regulatory
framework. Often the producers of the primary
materials may be integrated with downstream users of
their products. That means that the actual price of the
raw materials is not of great importance, but it merely
indicates where profits are recorded for accounting
purposes. The tax authorities will have some interest
in ensuring that transfer prices between the various
stages are not being used to evade taxes, but that need
Mineral Economics
not impinge on market prices. The list prices for the raw
materials may only be paid on the modest portion of
sales, often to small users, made outside the integrated
network. That was the case in the USA primary
aluminium industry, and largely still is. The prices of
semi-fabricated products are infinitely more important
to the major US aluminium producers than the price
of ingot. Progressive reductions in tariffs and other
barriers to trade between major metal producing and
consuming countries in the 1960s and 1970s lowered
barriers to foreign competition and made the defence of
domestic producer prices much harder. Prices could be
more easily undercut by imports.
Even where producers are able to tailor their
production to fluctuating demand the fit will rarely
be perfect. Individual producers may be unable to
bear the burden of financing large inventories, even
with accommodating financial institutions. When
markets are weak for extended periods the patience
of such institutions soon becomes strained and their
willingness to grant additional credit distinctly limited.
Hence recourse has to be made to production cut-backs.
Those are seldom easy to engineer unless one supplier
is prepared to shoulder the entire burden. Individual
producers may believe that they have an inherent cost
advantage that enables them to carry on producing at
a profit when others make losses. They may expect an
imminent improvement in market conditions, or they
may be loath to countenance any drop in market share
that might flow from their cut-backs. This all means that
collusive action between the suppliers has often been
necessary to ensure the appropriate cut-backs. This
might be no more than following the example set by a
dominant market leader, such as International Nickel
(the former Inco, which is now Vale Inco) in nickel,
or the former Amax in molybdenum. More than that
invites a legal riposte. The USA has long had legislation
prohibiting collusive action in restraint of trade, but the
diligence with which it has been enforced has varied.
The legal sanctions include possible imprisonment of
those individuals found guilty and the threat of triple
damages for any aggrieved parties.
In cases where producers published list prices have
been apparently stable for long periods, the prices
at which business is actually transacted can diverge
markedly. Large customers may enjoy volume discounts
that rise when market conditions deteriorate, and other
forms of incentive then creep in. When demand presses
against the limits of capacity, and redundant plant has
been brought into service, premiums may be imposed
on groups of customers, or even on all. Moreover,
rationing will sometimes be introduced, with long-
established customers favoured over casual trade. That
naturally creates a constituency amongst the aggrieved
parties in support of potential new entrants. It was
Incos inability to supply nickel during a strike in 1969,
and the ensuing acute shortages that triggered a massive
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chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

exploration boom and the subsequent development of
new mines elsewhere. That, in turn, undermined Incos
hold on the nickel market.
Typically producers list prices have tended to rise
over time, at least in money terms, with cost-justified,
or market-driven, increases much more common than
price cuts introduced when conditions are bad. The
burden of those is taken more on volumes supplied.
The benefits of productivity improvements of all types
are not fully passed on to customers, except when new
entrants threaten to undermine the established order.
Indeed, effective producer pricing may discourage
suppliers from pursuing productivity as aggressively
as those who are forced continuously to lower their
costs to survive in periods of falling market prices. The
inherent discipline of market pricing is one reason why
many producers nostalgically incline towards producer
pricing.
The ability of producers to set prices has been gradually
weakened not just by trade liberalisation but also by the
spread of demand away from its traditional locations,
and by the development of new facilities to meet that
rising demand. In the immediate post-war decade the
USA was the dominant producer and user of minerals
and metals, and prices were heavily influenced by the
actions of USA companies. Gradually, first Western
Europe, then Japan, and more recently China and other
countries, emerged to challenge the USA hegemony,
so that China is now by far the largest importer and
consumer of most mineral products. Simultaneously,
the nationalisation of foreign-owned mines and
processing plants by many countries, particularly, but
not exclusively, in the developing world, weakened the
ability of US companies to control supply. The newly
state-owned companies were often mainly concerned
to maximise their throughput and revenues. Also
new mines and plants were established in developing
countries, often by state enterprises. These lacked
any established marketing experience and they were
initially content to sell through merchants, who could
grant credit as well as obtain access to markets.
Another nail in the coffin of producer prices for
products that are produced and sold in a range of
countries was the collapse of the post-war system of
fixed exchange rates that culminated in the devaluation
of the US dollar in 1971. This ushered in a regime of
floating exchange rates that was initially accompanied
by rampant cost and price inflation. Although
currencies could, and did, change their parities under
the regime of fixed rates, such changes were infrequent.
The prevailing assumption, broadly justified by
experience, was of stability. Nearly all producer prices
were denominated in US dollars, which had been
regarded as a completely stable yardstick. Floating
exchange rates soon undermined that faith, and
contributed to diverging interests between producers
with different currencies, let alone between them and
consumers. What was a stable price in one currency
was not necessarily stable in another. That meant that
fixed dollar prices no longer provided unequivocal
signals about the changing balance between supply and
demand. Producers with appreciating currencies saw
their receipts shrink in their own currencies, sometimes
even when dollar prices rose. Conversely, those with
devaluing currencies saw their domestic revenues rise
even when markets were oversupplied and dollar prices
eased. The stability of producer pricing, and hence
one of its basic rationales, was undermined. Domestic
prices still diverge even when global prices are market-
determined and currencies fluctuate, but no one has
ever claimed that market-driven prices are stable.
A summary of the history of producer pricing in the
non-ferrous metals appears in Table 7.3.
Collusive action to fix prices has long been illegal in
the USA, but overseas markets have not been subject
to similar anti-trust legislation. That changed during
the early 1970s, with the development of the European
Unions competition policy. As discussed in the
previous section, anti-trust actions forced the demise of
the European producer pricing system for zinc during
the late 1970s. It was, however, already suffering from
differences of interest between the different suppliers.

Table 7.3
The history of producer pricing in major non-ferrous metals.
The US producer price (Alcoa) was dropped in 1986. Alcans World Price was the yardstick for pricing outside the United States to the end of 1988. It co-existed with
Aluminium
various free-market quotations. The London Metal Exchange pricing began in 1979 and progressively superseded producer pricing.
Central African and Chilean producers set a producer price between 1961 and 1966, when it collapsed. Most sales outside the United States have subsequently been
Copper
based on LME prices. Within the United States producer pricing continued until well into the 1980s.
Lead Within the United States posted producer prices persist, but the vast majority of the lead industry has long used LME prices as their pricing basis.
Inco posted its world producer price until December 1987. LME quotations began in late 1978. For much of the 1970s there was heavy discounting from posted
Nickel
producer prices, and free market prices were more reliable guides to transaction prices. LME quotations now dominate.
Prices in the London and Penang markets, which were the basis of most trade in tin, were effectively controlled by the operations of the International Tin Council
Tin (ITC) between 1956 and October 1985. With the collapse of the ITC prices became entirely market-determined, initially through reference to quotations in trade
journals, but then through the LME, when it restored its tin trading in 1989.
Most global business is now based on LME prices. Within the United States, prices were posted by producers until 1993. Elsewhere most producers nominally used
Zinc
the International Producer Price from its inception in July 1964 until its final demise in 1988. Its hold weakened from the mid-1970s, as described in the main text.

90 Mineral Economics
 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
Some are fully integrated from mine to refinery,
whereas others are not. Custom smelters face a
fluctuating market for their raw materials as well as for
their products. Costs of production, responsiveness to
fluctuating exchange rates and ability to adjust output
varied widely between producers. Given its fungible
nature, there is nothing to distinguish between metal of
a given quality from different producers so that users
had little loyalty to particular suppliers. There was no
long-term community of interest between the different
producers that would persuade them to tailor their
supply to demand for long periods, or to build up their
own stocks rather than sell into the market, and cheating
was rife. There was a tendency to set producer prices at a
high enough level to placate the least efficient producer.
That discouraged consumption, and provided scope for
the more efficient to expand. It also eased the path for
new entrants, who may have been outside the system.
Excess capacity inevitably resulted. The aftershocks of
the collapse of producer pricing reverberated around
the zinc industry for years.
There was always a tendency for all producer prices
to be too inflexible in response to changing market
conditions, and over the long term to be set too high.
The world copper producer price of the late 1950s and
early 1960s probably accentuated the over-supply of the
early 1960s. The European zinc producer price and the
stable nickel producer prices of the 1970s also tended
to create excess capacity. Inevitably some countries
or companies will not actively participate in producer
price schemes but will exploit them to full advantage.
These, rather than the active participants, gain the most.
Over the longer term there is a tendency to cheat, and to
discount in periods of weak demand.
Aside from any tendency for over rigid producer prices
to encourage excess capacity, there is a need to fund
large stocks in periods of weak demand. If producer
prices are to be credible compared with free market
quotations, the latter must be supported, however
thin the market. In a severe recession almost limitless
funds and nerves of steel are needed to support a given
price. Unless the support level is carefully chosen, the
available funds will run out, market prices will then
plunge and the participants will be faced with large
book losses.
That collusive action amongst suppliers to enforce
list prices is illegal in the major industrial economies
by no means rules out producer pricing. Some other
countries lack effective anti-trust rules, or may accept
that the resultant price stability is beneficial to their
export earnings. The publication of list prices, even
without collusive action, is still common in the minor
metals, and some industrial minerals. It often co-exists
with a dealer, or merchant, market in which prices are
far more volatile. That is not just because the latter
quickly reflects changes in the balance between the
global supply and demand, but also because merchants
Mineral Economics
will gain access to varying proportions of the total
supply over the course of the business cycle. In good
times producers will control a much greater share of the
total supply than when conditions are depressed and
their customers have more than they need and offload
the excess onto merchants.
When merchant prices diverge from list prices for
extended periods, in either direction, the producers list
prices become merely nominal, and of little practical
relevance. In time they may be completely withdrawn,
and all pricing then becomes based on the merchant
market. Prices are usually indicated through regular
compilations in the technical press of the averages or
ranges of the quotations of individual merchants for
specified grades and volumes. Prices of many minor
metals, such as cobalt, have been compiled in such a
fashion. No matter how assiduous and careful the
compilers of such prices, there is no guarantee that
much trade actually takes place at them. They are
indicative at best. On occasion market participants
have raised strong concerns about the validity of some
published prices.
For many market participants price transparency
is a mixed blessing. There is often dispute about the
relevance of published prices to particular trades.
Those purchasers who have managed to obtain special
deals, and their suppliers, often prefer secrecy rather
than publicity. Prices are something agreed between
consenting adults in private, rather than blazoned over
the pages of the technical press, even if discreetly at the
back amongst the small advertisements. Traders also
thrive where they can exploit their unique knowledge
of market conditions. Even so, the next logical step
from a large merchant-based market, with opaque
price formation, is the transfer of the process of price
discovery to some form of terminal market. That not
only enhances transparency, but offers opportunities
for hedging price risk. During the 2000s, market-
based pricing became increasingly common, partly
in response to the growth of Chinese demand, but
also reflecting developments in communications and
computer technology. Web-based pricing mechanisms
and screen trading improved market transparency and
lowered the cost of trading.
EXCHANGES
The essence of trading and pricing systems using
exchanges is that prices are set, on at least a daily basis,
to balance that days marginal offerings and demand.
Directly or indirectly, those prices govern all that days
transactions, whether or not they are actually made
through the exchanges. The offerings and demand may
come not only from industrial companies, whether
producers or users, but also from merchants and
investors of all types. Thus supply and demand in these
markets are much broader than production, whether of
primary or secondary material, and industrial usage.
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chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

Exchanges may have four main interlocking functions,
which they fulfil in varying degrees. These are:
1. the determination of daily reference prices for the
products traded
2. the provision of facilities for hedging against price
risk
3. acting as a market of last resort through a dedicated
warehouse network
4. giving opportunities for investment in metals as
assets.
Each exchange has its different methods and
traditions. Some do not provide for physical delivery,
but are solely paper markets. Some trade against price
index numbers, and much of their trade is in swaps or
OTC contracts. Where exchanges do act as a physical
market of last resort they are described as terminal
markets.
The leading terminal market for trading non-ferrous
metals is the London Metal Exchange (LME), which
accounts for over 90 per cent orof global exchange
business for those metals it trades. These are aluminium,
aluminium alloy or secondary aluminium, copper,
lead, nickel, tin and zinc. Steel billet was first traded in
2008, with cobalt and molybdenum added in 2010. The
CME Group trades copper and aluminium through
its Comex Division of Nymex, the Tokyo Commodity
Exchange started an aluminium contract in 1997, Kuala
Lumpur trades tin and the Shanghai Futures Exchange
deals in aluminium, copper, lead, zinc and gold.
The Singapore Exchange started trading aluminium,
copper and zinc in February 2011 mainly for investors,
using LME prices. New York, Tokyo, Hong Kong,
So Paulo and the London Bullion Market (LBMA)
trade precious metals. Crude oil and natural gas are
quoted by Nymex and the International Petroleum
Exchange in London. These markets trade in futures
and price derivatives, which are not always backed
by physical delivery. The China Beijing International
Mining Exchange (CBMX) began trading a spot iron ore
contract in May 2012.
The London Metal Exchange
The LME was first established in 1877. It was
extensively reorganised in 1987, following the default
of the International Tin Council, and the passage of the
United Kingdoms (UK) Financial Services Act, and it
became a limited company owned by its shareholders
in 2001. Its activities are closely related to the physical
metals trade, but it had to be fitted into the framework
established under the Financial Services Act. It is a
Recognised Investment Exchange regulated directly by
the Financial Services Authority, which closely defines
the conditions under which the Exchange operates, and
above all requires that it maintains orderly markets in
all its contracts. Where it carries out its activities in the
USA, such as the listing of approved warehouses, the
Exchange is governed by the relevant USA legislation,
and by the Commodities and Futures Trade Commission
(the CFTC). It is also subject to any relevant directives
of the European Union. The Exchange is responsible
for maintaining and policing its trading rules and
regulations, but the commercial and ethical conduct of
its members is regulated by a branch of the Financial
Services Authority. Although the Exchange is based in
London, most of its members are ultimately owned by
foreign companies, and it is a truly global market. It
opened a Singapore office in 2010.
A historical summary of LME contracts appears in
Table 7.4.
The copper, lead and zinc contracts have a long
history, as does tin. Trading in the latter, however,

Table 7.4
London Metal Exchange metals contracts.
Copper: 1877 with specification periodically changed. First official LME contract 1883. Present Grade A contract June 1986.
Tin: 1877, with specifications periodically changed. Contract suspended October 25th 1985, and re-introduced June 1989. First official LME contract 1883.
Pig iron: 1877 until 1920s.
Lead: 1920, but traded unofficially before then. The specifications have been periodically changed.
Zinc: 1920, but traded unofficially before then. The specifications have been periodically changed. Present Special High Grade 99.995 per cent contract introduced June 1986.
Aluminium: December 1978, with the contract changed to High Grade in August 1987.
Nickel: April 1979, with specifications periodically changed.
Silver: 1969 until mid-1989. New contract in May 1999 suspended in March 2002.
Aluminium alloy: October 1992.
North American Special Aluminium Alloy Contract (NAASC): March 2002.
Steel billet: Mediterranean and Far East contracts introduced in May 2008, with cash trading from July 2008. The Far East contract was combined with the more active
Mediterranean contract in July 2010 into a global Steel Billet contract.
Cobalt: February 2010, with cash trading from May 2010.
Molybdenum concentrates: February 2010, with cash trading from May 2010.
Index: April 2000. Based on the six major non-ferrous metals, but not actively traded.

92 Mineral Economics
 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
was halted after the collapse of the International Tin
Council in October 1985 and only resumed in 1989. The
zinc contract was given a new lease of life by the final
demise of European producer pricing in the 1980s, and
by the adoption of an LME pricing base by the USA in
1993. Trading in aluminium started in 1978 and nickel
followed in 1979. Both contracts were initially shunned
by their respective industries, and it was some years
before they were fully accepted as being representative.
The contract for aluminium alloy began trading in
early 1992 and was also slow to gain acceptance. It was
joined by a North American aluminium alloy contract
(NASAAC) in March 2002. Pig iron was traded for a
period until the 1920s, and trading in silver began in
1969, ceased in mid-1989, resumed on a new basis in
May 1999 and was suspended once more in March
2002. Trading in steel billet began in 2008 with two
regional contracts that were combined into one global
contract in July 2010. Contracts were introduced for the
minor metals, cobalt and molybdenum concentrate, in
February 2010. The relative importance of each contract
varies annually depending on the market conditions
for each metal. In 2010, aluminium accounted for
about 45 per cent of the total number of lots traded,
copper accounted for almost 24 per cent and zinc for
15 per cent. Lead and nickel each provided around six
per cent of the lots traded, and tin four per cent. The
two aluminium alloy contracts accounted for just over
one per cent, and the fledging steel and minor metal
contracts for a negligible proportion.
Only a very small percentage of the volume of non-
ferrous metal produced and traded is physically
delivered into LME registered warehouses, but the
bulk of the worlds non-ferrous metals are traded by
reference to LME prices, and the LME captures by far the
greater share of hedging business. Trading is by open
outcry across a ring, in which the dealers sit and shout
their bids or offers in designated short periods. This is
backed up by a 24-hour telephone-based inter-dealer
market outside ring trading sessions and by a screen
trading system, LMEselect. This was first introduced
in early 2001, and has been gradually refined. It allows
accredited traders to execute trades electronically,
and allows for straight-through processing in which
LMEselect trades are automatically sent for matching
and clearing. The system also enables LME members to
connect their clients directly to the LMEselect trading
system via third-party applications, a process known
as order-routing. The share of total LME business
transacted through the ring itself has gradually declined
to roughly one-fifth.
The basic contract for each metal is for three months
forward, with each working day being good for
delivery against the prompt, or delivery dates. Daily
cash prices are also fixed, with additional prices for
fifteen months ahead for tin, steel billet, cobalt and
molybdenum concentrates, going to 27 months for
Mineral Economics
aluminium alloys, 63 months for lead, nickel and
zinc, and 123 months for aluminium and copper. The
prompt dates were last extended in September 2008.
The prices are strictly forward prices for future delivery
on specified dates, rather than the futures prices traded
in most other markets such as Nymex. This is one of
the LMEs distinguishing features. All prices are fixed
in US dollars, the prime currency of the non-ferrous
metals industry, but with facilities for also clearing in
sterling, Japanese yen and euros.
The prices established by open outcry at the close
of the second, or official, rings become the official
settlement prices for each days trading. These rings
concentrate bids and offers from the whole world into
one brief trading session, which reaches its peak at the
closing bell. The prices reflect the marginal tonnage
offered and demanded that day, no matter the source
or the destination. They inevitably fluctuate daily, but
broadly reflect, under normal circumstances, the global
markets balance of supply and demand.
Trade is conducted in lots rather than tonnes, with
each lot of aluminium, copper, lead and zinc amounting
to 25 t. Nickel is traded in 6 t lots, tin in 5t, aluminium
alloys in 20 t, steel billet in 65 t, cobalt in 1 t lots and
molybdenum concentrates in lots of 6 t of contained
molybdenum in 10 t lots of roasted molybdenum
concentrates. Prices are set for metal that meets the
prevailing contract specifications, which are established
with reference to the needs of the producing and using
industries. Individual producers brands that meet the
contract specifications can be registered and are good
for delivery once they have been tested and accepted.
The contract for each metal sets out the shapes, weights
and methods of strapping. The contract specifications
are for that quality and shape of each metal that is
most widely traded and demanded. Specifications
have tended to rise over the years. In the 1980s, for
example, the aluminium specification was raised from
a minimum of 99.5 per cent aluminium to 99.7 per cent,
and the copper contract moved from wirebars to Grade
A cathode. The quality of zinc has been progressively
raised, initially from good ordinary brand (GOB) to high
grade, and then the special high grade with minimum
99.995 per cent zinc that is traded today. The contracts
specify minimum standards, which many producers
easily exceed. The daily prices do not distinguish
between the individual registered brands, but brokers
and traders may pay premiums for particular brands
that are especially in demand. Similarly, the price is
for delivery into or out of any registered warehouse,
no matter where it is located, and premiums may be
established for specific locations.
Whether they are concluded on or off the ring, all
LME contracts are matched and cleared through
LCHClearnet. In 2011, the LME announced that it was
considering introducing its own clearing mechanism,
but no decision has yet been reached. Before the
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chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
clearing arrangements were introduced in 1987 brokers
acted as principals, which meant that the markets users
faced a risk of their broker defaulting. The clearing
mechanism offers security to all users of the market that
their contracts will be honoured, even if the initiating
broker were to go bankrupt. The prime distinguishing
feature of LME contracts is that they are not cash
cleared. In other words, users of the market do not
have to contribute additional cash when their contracts
are making losses, nor can they take out profits ahead
of the prompt date. Rather the contracts are cleared
against bank guarantees, with brokers granting credit
to their clients. Most trade users also do not insist that
their business is segregated. These features make the
Exchange particularly useful for trade users, who do
not have to commit variable, and uncertain, amounts of
working capital to use the market.
Other exchanges that trade in metal futures, or
in energy products, like the New York Mercantile
Exchange, are cash cleared. It was the ability to take out
paper profits when prices were rising that enabled the
Hunt Brothers to drive up silver prices so dramatically
in 1979 - 80, when they were attempting to corner the
silver market. They could reinvest their paper profits
in margins on yet more futures contracts. When the
bubble burst and prices started falling, repeated calls
for additional cash margin accelerated and accentuated
the decline of genuine hedging as well as speculative
business. In order to provide more convenient contracts
for investors the LME introduced 5t LMEminis for
aluminium, copper and zinc in December 2006. These
are cash-settled monthly futures contracts that can be
traded on LMEselect or in the telephone market, or
through a link with the Singapore Exchange. Prices are
based on the settlement prices of the parent contracts.
Credit clearing makes it easier for the metals industry
to use the market to hedge against price risks. Hedging
is the elimination of uncertainty at a known cost.
Users of the market with future commitments for
purchase or delivery of physical metal can buy or sell
an equivalent, and offsetting, forward contract that
matures at the same time. The prices are known today.
When the time comes to deliver or buy, the user can
close out the forward contract and take either a loss or
a profit to set against the offsetting profit or loss on the
physical contract. The liquidity of each contract tends
to diminish rapidly the further forward they go beyond
three months.
In addition to conventional forward contracts, the
LME also trades options. These give the purchaser
or the seller the right, but not the obligation, to buy
or sell at the strike price. The premium paid for this
right varies inversely with the amount by which the
strike price varies from prevailing price levels. It is
like an insurance premium to protect against a known
event. The LMEs traded options are mainly so-called
European options, which refer to prices on specified
94
future dates, the third Wednesday of each month. Most
users are much more interested in achieving average
prices over a period, such as a month or a year. Until
1997, the substantial and fast growing business in
Asian options of this type was conducted OTC in deals
specifically tailored for individual users. The LME
introduced traded average price options (TAPOs)
in early 1997, initially for aluminium and copper, but
now for all the metals, to provide the protection of the
clearing mechanism to such widely used contracts, and
to increase market transparency by bringing them into
the open. Most OTC options deals are denominated in
US cents per pound of metal, whereas LME contracts
are expressed in US dollars per tonne. Its strike prices
are, therefore, too far apart and inconvenient for the
LME to attract as much business to its contracts as it
initially expected.
Metal brokers can provide an infinite variety of
combinations of forward prices and options to cover
virtually any eventuality. The underlying mathematics
and the jargon of these various price derivatives
can be complex, but their basic function is to enable
producers and users of metals to eliminate the risk of
unpredictably volatile prices at a known cost. The use of
options overcomes one of the basic problems of forward
contracts, which lock in specified prices. Use of those
denies the seller the benefit of any upside if prices at the
time of delivery greatly exceed the contracts forward
price, and the purchaser the benefit of any fall below
the forward price. The latter is particularly important
for fabricators who are actively competing for business,
and operating on tight margins. One of their major
concerns is that their competitors do not buy their
raw materials on more favourable terms. No matter
what combination of hedging mechanisms is used, it is
always the responsibility of the users management to
ensure that it is aware of exactly what is being done,
and of the potential risks involved. The well-publicised
incidents in which companies have lost heavily in
metals trading have all been ultimately traceable back
to lax management in the affected companies.
The growth of options trading has been of especial
value to investors in metals, otherwise known
pejoratively as speculators. There must always be
individuals or firms who are prepared to invest in
metals in order to provide adequate liquidity to the
market. Without such liquidity, the costs of hedging
could become prohibitive. Moreover, prices could
periodically swing uncontrollably in one direction or
another, unless there were always people who were
willing and able to take contrary views to the market as
a whole. Trade use of the LME remains substantial, but
investors of all types have become far more important
during the last decade, at times accounting for the lions
share of trades.
Commodities have been increasingly regarded as a
class of assets whose inclusion in a portfolio improves
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 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

its risk profile. Very low interest rates since the
banking collapses of late 2008, and the drop in metal
prices immediately following the GFC, accentuated
investment in commodities, including metals, as the
prospective returns exceeded those obtainable on other
assets. A widening range of financial institutions has
invested in metal futures and options, although the
financial sectors holdings of physical metal remain
very low. Much investment demand is cyclical in that it
has tended to evaporate during periods of weak market
conditions. It is greatly influenced by expectations
about future price trends and by the returns available
on more conventional classes of asset.
Partly in response to investment demand, the LMEs
turnover greatly exceeds the global production and use
of each metal. In 2010, the multiples of LME turnover
to global output varied from 21 for lead up to 42 for
copper, with tin at 22, nickel at 30, aluminium at 31 and
zinc at 37. The multiples were much lower (two to five)
for the aluminium alloy contracts. These large multiples
by no means reflect the amount of speculative activity
and investment demand, as they have been at similar
levels even when that has been weak. A proportion of
LME turnover comes from brokers adjusting contract
dates and volumes to meet the precise needs of their
customers.
It is seldom wise to attribute sharp and unexpected
shifts in prices to the speculators. However good the
statistics about consumption and production in the
recent past, prices also reflect expected trends. We do not
always have sufficient knowledge about the present and
the future. Forecasts usually cluster together, and they
are often wrong, perhaps because of random shocks.
Sometimes market sentiment can change dramatically,
almost overnight, and prices have to catch up. Sharp
and apparently inexplicable price movements can often
be explained retrospectively by fundamental forces.
Speculative investment tends to even out over time,
and prices do broadly reflect relative shifts in supply
and demand. At times, however, investment in metals
as such can become substantial and prices can then be
driven up, or down, more than might seemingly be
warranted by underlying trends in supply and demand.
Much of the LMEs turnover arises from its use as a
market of last resort. LME contracts provide for physical
delivery, and in support there is a network of registered
warehouses throughout the world. The Exchange itself
does not own or operate the warehouses, and nor does
it own the metal they contain. It approves warehouse
locations, with the objective of having a widespread
network throughout the world in all important areas
of net consumption. Warehouse locations must have
appropriate fiscal and regulatory systems, be served
by a good transport network, have the facility to store
goods without payment of duty and enjoy political and
economic stability. These requirements rule out some
apparently desirable locations. Once locations have
been decided, warehouse companies may apply to open
facilities. The contract between the Exchange and those
companies that satisfy its criteria sets out the warehouse
companys rights and obligations, and it provides for
a disciplinary procedure. Metal of approved brands
may be delivered into a warehouse to satisfy delivery
commitments, in exchange for LME warrants. These
are bearer documents giving title to a specific parcel
of metal in a specified warehouse. The terms on which
metal is delivered and stored are agreed between the
warehouse companies and the companies who deliver
it. There are 36 approved warehouse locations, of which
two in Turkey are only for steel billet, and over 600
registered warehouses or compounds (Figure 7.5).
When markets are over-supplied, metal flows into
warehouses, and it moves out again when markets
tighten. Movements in the stocks held in LME registered

3 locations in the UK; all metals. 19th century to 1994

14 locations, 7 countries in Europe: all metals. 1962 to

2008, but the 2 in Turkey only steel
3 locations in Korea; not lead or zinc. 2001 to 2008
10 locations in USA; all metals. 1991-2008

Fig 7.5 - London Metal Exchange registered warehouse locations in 2011 (note: the number of locations increased during the 1990s to cope with an inflow
of metal associated with the collapse of the former Soviet Union and global recession, and several little-used locations were subsequently de-listed).

Mineral Economics 95
chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
warehouses are thus useful indicators of market
conditions. Over the years there has been a progressive
move towards placing a greater proportion of surplus
metal in LME warehouses. This partly reflects the
growing use of the Exchange for hedging and as a price
reference, and the extension of the warehouse network.
Warehouses were originally confined to the UK, with
locations first authorised in mainland Europe during
the 1960s. Singapore and Japan followed in the late 1980s
and the USA in 1991. Dubai and Korea were added in
2001, although Dubai was good for silver delivery from
1999 to 2002 and Malaysia was first registered in 2004.
Turkey was approved as a location for storing steel billet
in 2008. Some locations may not store particular metals,
either because they are close to major producing areas
such as Singapore was historically with tin (until the
LME lifted this limitation in 2002), or because of local
restrictions on trade. Thus Japanese warehouses only
store aluminium, Dubai does not take aluminium and
Korea may not accept zinc. LME copper trading only
commenced in the USA in 1995.
The growth of LME stocks relative to total reported
inventories was also part of, and primarily mirrored, a
global trend towards reducing the amount of working
capital tied up. If metal is held in LME registered
warehouses, there is much less need to hold stocks in
producers or consumers yards, and no need for the
metals industry itself to arrange their financing. LME
warehouses became magnets for surplus metal during
the recessions of the early 1990s. Excess western supplies
were greatly augmented by outflows from eastern
countries. Although much of the latter was not registered
for LME delivery, it partly displaced metal that was,
allowing the latter to be delivered into warehouses. Had
the surplus metal not gone into LME warehouses most
of it would have been absorbed elsewhere, and there
would have been little, if any, cut-back in production
beyond what actually occurred. From 1994 onwards
the tonnage of metal held in warehouses contracted,
but the withdrawals did not necessarily flow into final
consumption. Much was taken out of LME registered
facilities partly to reduce its visibility and influence
prices. The expectation was that final demand would
soon rise sufficiently to absorb excess stocks. In the
event demand rose less than expected, and LME stocks
levelled out. For most metals they fell to rock-bottom
levels in 2004 - 2006 in response to booming demand,
and then rose sharply after the banking collapse of
late 2008 and the subsequent recession. During part
of 2009 - 2010 the normal inverse relationship between
LME prices and stocks was temporarily disrupted for
some metals as a consequence of a surge in financial
institutions demand for metals as assets.
The spread of the LMEs warehouse network from its
predominantly European focus changed LME prices
from mainly reflecting European balances between
supply and demand into global indicators. That, in
96
turn, altered the structure of premiums over and
above LME prices for delivery in particular locations.
The LMEs settlement prices will inevitably reflect the
balance between deliveries of metal into warehouses
and shipments out. There may be net inflows in some
locations at the same time as metal is flowing out
elsewhere. Not all locations and warehouses are equally
accessible or convenient, and the charges for taking
metal out vary. The warehouse companies in the less
favoured locations have sometimes offered inducements
to traders to place metal in their warehouses, and once
it is there it tends to stick. Inevitably, the tendency to
offer inducements in order to attract and retain stocks
has spread to most warehouse companies.
The wider the warehouse network, the easier it
becomes to deliver metal onto warrant when markets
are tight. When markets are well supplied they are
usually in contango. In other words, prices for future
delivery exceed cash prices by a margin that represents
the costs of storage and insurance, and the rate of
interest, or the time value of money. To the extent
that warehouse companies offer any special deals on
rents, the normal contango will be reduced. Other
things being equal a rise in warehouse rents or interest
rates would be accompanied by a widening of the
contango. Often, however, such an adjustment would
be swamped by other influences on prices. The further
forward the quoted price, the greater the margin above
cash prices, although a lack of liquidity for the far
forward dates could influence the relationship. Without
any extraneous shocks the relationship between prices
for the different delivery dates is stable.
When, for one reason or another, there is a shortage
of metal for immediate delivery prices move into
a backwardation. That means that cash prices for
immediate delivery rise above the forward prices. There
may be sound fundamental reasons for a backwardation,
such as transport disruptions, or a strike at a major
producer. A prolonged shortage of supply relative to
buoyant demand can cause them to persist for long
periods. The only cure is an influx of metal into LME
warehouses, which is sufficient to restore balance. A
backwardation often makes it worthwhile for those who
have excess tonnage, however temporarily, to deliver
into warehouses in order to earn a rate of return that
may greatly exceed the cost of finance. The emergence
of bubbles in the pattern of prices is, however, often a
sign that someone is attempting to squeeze the market.
In other words, they may have gained control of the
greater part of the available LME inventory and also
have large long positions that give them potential
access to far more metal than they need to meet their
future commitments. Those who are short will have to
pay the backwardation, or borrow metal at a cost, in
order to meet their commitments. Just occasionally the
market may be squeezed inadvertently by a merchant,
but often there will be deliberate manipulation. That
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 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
offends against the preservation of orderly markets,
which is one of the LMEs prime functions as a
Recognised Investment Exchange.
Backwardations raise the costs of hedging for physical
users of the market, sometimes prohibitively. They can
also distort the validity of LME quotations as reference
prices for the global metals industry. The LMEs rules
and regulations give it considerable powers to prevent
manipulation and punish members who break those
rules. In order to ensure orderly markets the Exchange
operates a system of lending guidance whereby holders
of dominant market positions are required to lend
into the market on progressively more onerous terms
depending on the size of their market positions. This
guidance acts as a safety valve that limits potential
gains from deliberately building dominant positions
in order to squeeze the market. The Exchange has no
jurisdiction over the parallel physical market, or over
non-LME businesses. Squeezes may often be engineered
in the OTC market rather than in LME contracts,
although they spill over into the behaviour of LME
prices. The best defence against market manipulation is
the greatest possible transparency in all types of trade.
Since mid-1996 the LME has greatly increased the
amount of information that it publishes, but it always
faces a difficult balancing act. An excessive insistence
on transparency could lead to trade drying up or being
driven offshore, or to OTC markets that are outside the
scope of any regulation. That would not necessarily be in
the users best long-term interests, as was demonstrated
by the GFC of 2008 - 2009. This prompted a continuing
move towards tighter regulation of OTC derivatives of
all types, and a recognition of the benefits of clearing
through organised markets.
The LMEs main competitor, the New York Mercantile
Exchange, has claimed that it has lost trade to the LME
because the latter has been less tightly regulated. The
methods of regulation in London and New York are
certainly very different, but the LME is no less tightly
controlled and policed than its US counterpart. The
main reason that the LME captured most of the global
business in non-ferrous metals is that its contracts and
methods of trading have been more suited to the needs
of trade users than those operating in New York. The
LMEs main attractions include its system of prompt
dates, its extensive warehouse network and credit
rather than cash clearing. It also straddles the three
main global time zones, picking up the close of business
in Asian markets early in the day and overlapping with
New York in the afternoon. Finally, the UK does not
have a large domestic mining and smelting industry
with vested interests, but it does have a long tradition of
open markets and liberal trading. The Comex Division
of the New York Mercantile Exchange has much lower
liquidity, with trade concentrated on hedging by
domestic US companies and on speculative investment
business. A considerable amount of its trading is
Mineral Economics
conducted on their own account by locals, rather than
for trade clients. Arbitrage between the London and
New York markets has ensured that their respective
prices rarely step too far out of line with each other.
The present systems will only survive, however,
as long as the markets users are content that they
give prices that are properly representative of market
conditions. The prices set are far more chaotic and
seemingly more haphazard than producer pricing
systems, but more transparent and reflective of
changing market conditions.
Some criticise LME prices as being excessively
volatile, under the influence of investment in metals
by financial institutions of all types, often grouped
under the general description of speculators. Certainly
prices can move markedly even within the course of a
day, let alone from one day to the next. The explosive
growth of options-related business also appears to
have introduced extra volatility. Much of that business,
however, is conducted on behalf of producers and
fabricators insuring against adverse future price
trends. To the extent that a significant proportion of
annual production is protected for months, or even
years, ahead, that much will be less responsive than it
might previously have been to weakening prices. The
protected producers will have no immediate need to
cut their output because they are incurring cash losses.
That, in turn, means that the burden of any excess
supplies in recessions is thrown more heavily than in
the past on prices rather than volumes. That alone will
give the appearance of increased price volatility, but
it owes nothing to speculative activity. Evidence that
prices of non-ferrous metals have become more volatile
in recent years solely because of speculative activity
is rather tenuous. Those who assert that prices have
become more volatile have usually looked at trends
over relatively short periods and have failed to allow
fully for the many factors influencing prices.
RECENT TRENDS IN MINERAL MARKETS
At the start of the new millennium most sectors of the
minerals industry seemed set for a prosperous decade.
The major international political tensions that had
persisted since the Second World War were largely
resolved, market capitalism had seemingly triumphed
over more dirigiste systems and the global economy
was becoming increasingly unified. It had quickly
shrugged off the Asian crises of 1997 - 1998, and had
resumed apparently healthy expansion, inflation had
been tamed, currency markets were relatively stable
and oil prices remained subdued. Subsequent events
showed that any complacency was sadly misplaced and
that turbulence was developing beneath an apparently
smooth surface. Led by the USA the major industrial
economies were on the brink of recession, and new
political tensions and uncertainties were developing in
the world at large.
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 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

Demand for mineral products is driven by economic house-building in the van, but their capital spending
activity, which faltered in 2001 after a strong start to the contracted after 2008. Chinese and Indian capital
decade. Figure 7.6 shows the annual rates of change of spending rose as a share of total output in 2009 - 2010
output, both globally, in the major advanced economies from already high levels, as shown in Figure7.7.
(Canada, USA, Japan, France, Germany, Italy and The share of Chinese output devoted to investment
the UK), and in China from 1998 onwards. Although explains why its demand for many mineral products
the 2001 recession was relatively brief, the annual has risen faster than its total output. The share has been
rate of economic growth of the advanced industrial unsustainably high and the International Monetary
countries did not regain its 1999 - 2000 rate, even in Fund predicts more moderate levels in coming years.
2004. Fortunately for the minerals industry the newly-
industrialising and emerging economies took up the 50

slack, growing strongly throughout the decade. 45

China
40
16
35
14
30
India
12

% of GDP
25 World
10
20
% per annum change

8 Major Advanced economies

15
6
10
4
5
2
0
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-2

-4
Fig 7.7 - The percentage share of fixed investment as a percentage of Gross
World Major advanced economies China Domestic Product, 1998 - 2011 (source: International Monetary Fund 2012).
-6

Fig 7.6 - The growth of economic activity (Gross Domestic Product), 1998 - 2011
(source: International Monetary Fund 2012).
From 1999 onwards, global growth was much greater
than that of the advanced economies, and in 2004 -
2007 exceeded four per cent per annum. The strength
of global activity over the period owed much to the
strength of Asian economies, and especially of China.
The buoyant Chinese economy has been the main
force driving demand for mineral products over the
past decade. Its share of world output (measured on a
purchasing power parity basis) rose from 6.3 per cent in
1997 to 13.6 per cent in 2010. This has been partly at the
expense of growth elsewhere, with Chinese exporters
benefiting from a low cost base and an undervalued
currency, but it mainly reflects strongly growing
internal demand, led by heavy investment in plant,
equipment and infrastructure.
The financial crises and banking collapses of 2008 -
2009 abruptly halted the global expansion in its tracks,
and in 2009 the advanced economies experienced their
% change on previous yea
The relationship between overall economic activity
and the mineral and metals industry is brought out in
Figure 7.8, which compares annual percentage changes
in global Gross Domestic Product, the usage of primary
aluminium and refined copper and the output of crude
steel. Although demand for each mineral and metal
product is driven by different end-use markets, all
follow broadly similar trends. Many depend directly
on the performance of the steel industry. Copper usage
grew quite strongly in 1999 - 2000, when the US economy
was booming, but it fell in 2001 and grew more slowly
than global activity for most of the decade. By contrast,
aluminium consumption and steel production were
relatively weak in 1998 - 1999, but grew much more
strongly than global GDP between 2001 and 2007, and
16
14
12
10

deepest recession since the 1930s. Global output also 6

contracted in 2009, but China continued to expand. The 4

2
global recession, which was intensified by inventory 0
adjustments, proved relatively brief in response to -2
fiscal and monetary easing, and global output revived -4

strongly in 2010. The stresses in many economies that -6

led to the 2008 - 2009 crises had not been righted, -8

World GDP Refined copper usage Crude steel output Primary aluminium usage

however, and growth rates eased back in 2011. -10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

The demand for minerals is heavily biased towards Fig 7.8 - Global Gross Domestic Product, aluminium and copper usage and
the construction, capital goods and consumer durable steel output, per cent per annum changes 1998 - 2011 (sources: International
sectors. Even advanced economies witnessed strong Monetary Fund, 2012, International Copper Study Group, 2012, World Bureau of
fixed capital expenditure in the 2003 - 2007 boom, with Metal Statistics, 2012 and World Steel Association, 2012).

98 Mineral Economics
 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

again in 2010. Both contracted in 2008 - 2009 by more Table 7.5

than global GDP. World oil demand (million barrels per day)
The strong growth of metals production and (source: International Energy Agency 2012).
consumption derives from Chinas burgeoning economy. OECD China Others World
Chinese production of crude steel rose from 128 Mt in 2000
2000 48.0 4.6 24.5 77.1
to 627 Mt in 2010, accounting for 88 percent of growth
in global output over the decade. It had an 81 per cent 2001 48.0 4.7 25.1 77.8
share of the decades rise in aluminium consumption, 2002 48.0 5.0 25.5 78.5
and 135 per cent of the increase in copper usage. In 2003 48.7 5.6 25.8 80.1
other words, the demand for copper contracted outside 2004 49.5 6.5 27.2 83.2
China. Inevitably Chinas rapid growth has spilled over
2005 49.9 6.7 28.0 84.6
into strongly increased demand for raw materials from
overseas, and in that regard these three metals have been 2006 49.5 7.2 28.9 85.6
typical of most minerals, including fuels. 2007 49.3 7.6 30.2 87.1
Figure 7.9 shows Chinas growing dominance in the 2008 47.6 7.7 31.2 86.5
metals sector. It shows Chinas shares in 2000 and 2010, 2009 45.6 8.1 31.8 85.5
and the annual average growth rates of world output or
2010 46.2 9.1 33.0 88.3
consumption during the decade. The slower growth of
copper than of the other two metals reflects both supply 2011 45.6 9.5 34.0 89.1
constraints and the impact of substitution in response
to high prices. The effects of rising demand on prices were
accentuated by continuing political tensions in the
Middle East. Speculative pressures were further
influences in driving crude oil prices up in early 2008
China China

Crude steel Primary aluminium

to their highest levels in real terms since the 1970s.
In money terms prices had never been higher. Their
output consumption
5.2% p.a. 4.8% p.a.

behaviour from 1999 onwards, as expressed in the spot

price of Brent crude on the International Petroleum
2000
2000

Exchange in London, is illustrated in Figure 7.10.

2010
2010

160
China

140

Refined copper
usage 120
2.4% p.a.

100
US $/barrel

2000
80
2010

60
Fig 7.9 - Chinas shares of global output of crude steel and consumption of alu-
minium and copper, 2000 and 2010 (sources: International Copper Study Group, 40

2011, World Bureau of Metal Statistics, 2011 and World Steel Association, 2011). 20

A strong global economy not only boosted demand 0

for non-fuel minerals, but also for fuels, including
petroleum. World demand for crude oil, shown in
Table7.5, rose by 3.4 per cent in 2004, the largest
percentage increase for many years, forcing demand
against the constraints of effective capacity. Iraqs
output had not recovered from the ravages of war, and
some members of OPEC held back production.
The Organisation for Economic Co-operation and
Development (OECD) countries, led by the USA,
raised their consumption in 2003 - 2005, but their off-
take then eased back, with sharp falls in 2008 and 2009.
The OECD countries combined share of the total fell
from 62percent in 2000 to 51 per cent in 2011. The
main growth was in the rest of the world, with Chinese
demand more than doubling between 2000 and 2011,
raising its share from six per cent to almost 11 per cent.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fig 7.10 - Monthly average prices of crude oil (US$/barrel for Brent crude)
(source: International Petroleum Exchange).
Prices had weakened in 2001 - 2002 in response to
recession, with the attack on the World Trade Centre
in September 2001 having no real impact. The Iraq war
caused a minor blip in 2003, but prices really only started
to rise strongly during 2004. They peaked temporarily
in 2006, and fell back to early 2007, before the surge of
2007 - 2008. The levels reached from 2006 raised concerns
about possible adverse effects on global inflation and
levels of economic activity. Prices collapsed in 2008 with
the drying up of speculative investment and the effects
of the GFC on demand, but the fall was temporary.
Subsequently, prices revived in response to resurgent
demand and political uncertainties. The Arab uprisings

Mineral Economics 99
 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

of early 2011 and Middle Eastern tensions added to peaked in 1997, and it subsequently plummeted, not
the pressure, notwithstanding compensating increases just in response to weak markets, but also because of
in Saudi Arabian output. Not only do high oil prices the off-putting effects of the Bre-X fraud (where a gold
have potentially adverse effects on demand for mineral project in Indonesia had been hyped on the basis of
products, but they also directly raise production costs. non-existent ore reserves) and the competing lure for
In part the rise in oil prices was initially justified by an speculative investors of dot com projects. The trough
accompanying weakening of the US dollar in currency in exploration spending was reached in 2002, with that
markets. Some oil producing countries tailored their on gold down from 1997s US$2.6 B to under US$0.8 B.
supply in order to raise prices sufficiently to offset the Exploration for other products dropped from US$2.5 B
dollars decline, but such fine tuning is seldom possible. to US$1.1 B over the same period. The recovery in prices
The performance of the US dollar has been a major from their recessionary trough brought a corresponding
influence on the prices of all internationally traded revival of exploration, with spending on gold rising
mineral commodities. Figure 7.11 plots two measures to US$4.9 B in 2008, and that on other products up
of the real effective exchange rate since January 1998. It to US$7.7 B (source: Metals Economics Group, Nova
strengthened by 21 per cent against a weighted average Scotia). Spending on exploration was inevitably badly
basket of major currencies (those of Australia, Canada, hit by the global financial crisis (GFC) and its aftermath,
Euroland, Japan, Sweden, Switzerland and the UK) with expenditure on gold exploration dropping to
between October 1999 and February 2002. It followed $3.5B in 2009 and on other products even more steeply
a similar trend, but to a less marked extent, against to $3.8 B. The declines were largely reversed in 2010,
the currencies of a much larger group of its trading and exploration spending rose to a new peak in 2011, as
partners, partly because some of those currencies are shown in Figure 7.12.
pegged to the dollar itself.
18000

125 16000

14000
US $ million in real 2010 terms

120
Major currencies
115 12000
Index numbers. January 1998=100

110 10000

105 8000

100 US trading partners 6000

95 4000

90 2000

85 0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
80

75 Fig 7.12 - Corporate exploration spending in real 2010 terms (sources: Metals
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Economics Group, 2012 and United States Bureau of Economic Analysis, 2012).
Fig 7.11 - Effective monthly average real exchange rates of US$
(source: United States Federal Reserve Board, 2012). A weakening of the US dollar contributed to the rise in
metal prices between 2002 and 2008, to the weakening
Prices of most minerals and metals are denominated of prices in 2009 and to their subsequent revival. The
in US dollars, and its exchange rate is a strong influence dollars real exchange rate against major currencies
on those prices. Ceteris paribus, a strengthening of the fell by 33 per cent between early 2002 and early 2008,
US dollar, leads to falling dollar prices and a weakening rose by 18 per cent in the ensuing year in response to
dollar to rising dollar prices. Many producers whose the GFC and then dropped again by 16 per cent up to
currencies strengthened against the dollar also saw July 2011. Concerns about the euro area then caused a
rising costs and falling margins in 2000 - 2002 to the modest appreciation.
point where they were forced to suspend or curtail The inverse relationship between real US dollar
operations. The adverse impact of the currency squeeze exchange rates and gold prices is illustrated in
was accentuated by the simultaneous weakening of Figure7.13. Gold prices had averaged below US$400/oz
demand because of recession. Capital spending of all throughout the 1990s, and had fallen sharply from 1996.
types, but especially on exploration and grassroots The recovery began in late 2001, after the attacks on the
projects, was pared back as the industry strove to World Trade Center, and it was fostered not just by the
minimise costs. These years witnessed a surge in weakening US dollar, but also by rising international
mergers and consolidations in many sectors of the tensions. Rising oil prices and fears of resurgent
industry, with a pronounced peak in 2001. inflation gave an added fillip from late 2004. The rise in
The gold industry was especially hard hit by weak gold prices was temporarily reversed in 2008 with the
prices in the late 1990s and early 2000s. Exploration onsetting GFC, but that was a temporary lull and prices
spending of all types, heavily biased towards gold, had then rose strongly. Concerns over rising international

100 Mineral Economics

 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

650 125
activity, but with different timings and variations.
Speculative activity by financial institutions of all types,
600
120
550
115 including hedge funds, may have hastened, and even

Exchange rate index Jan. 1998=100

500 Real US $ exchange rate Gold price
Gold price index Jan.1998=100

450 110 enhanced, some price rises, but the basic determinants
400 105 were improving demand and a weakening US dollar.
350
100 After the GFC of 2008 weakened, demand relative to
300

250 95 supply forced prices down, but for many products the
200 90 fall was temporary.
150
85 Figure 7.14 shows the behaviour of a weighted average
100

50
80 index of non-ferrous metal prices (LMEX) from the start
0 75 of 1999. Prices rose during 1999, but levelled out in 2000,
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
and fell back between September 2000 and late 2001.
Fig 7.13 - Index numbers of monthly average gold prices and real effective The recovery did not reach its stride until after May
exchange rates of the US dollar against major currencies (sources: United States 2003. Prices then rose strongly until the early months of
Federal Reserve Board 2012 and London Bullion Market Association 2012). 2006 and then fluctuated around a high level over the
next two years. The collapse from early 2008 to early
tensions, fears of strengthening inflationary pressures,
2009 was dramatic, taking prices back to their levels of
worries about the stability of the euro and low rates of
early 2004. The setback was, however, relatively brief,
return on other assets all fanned the flames of golds
and by early 2011 the index approached its early 2007
rising prices. The monthly average London price peaked
peak. Subsequently, prices drifted back, but remained
in September 2011 and subsequently eased slightly, but
high relative to their average of the previous decade.
the gold market remained tense.
The different metals shared in the overall trend to
Prices of non-ferrous metals lagged behind gold prices differing extents and with different timings.
in 2002 - 2003. In some cases capacity had outstripped
demand, notwithstanding mine and plant closures and 5000

cut-backs. There were also large inventory overhangs, 4500

particularly in the most visible form of exchange 4000

Index January 4th 1999 = 1000

stocks. Their existence initially moderated the impact 3500

of improving supply/demand balances on price levels. 3000

Table 7.6 shows the end-year levels of LME warehouse 2500

inventories from 1999 onwards. 2000

LME warehouses are not the only sources of readily 1500

available metal, and stocks have moved substantially 1000

within each year. Nonetheless, Table 7.6 gives a broad 500

indication of the changing pressures of demand for the 0

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

various metals. They all danced to the beat of economic

Fig 7.14 - The London Metal Exchange index of non-ferrous metal prices 1999 -
Table 7.6. 2012 (source: London Metal Exchange 2011).
Inventories in London Metal Exchange warehouses at year-end, 1999 - 2011
(thousand tonnes) (source: London Metal Exchange 2012). One contributor to the rise in the prices of gold and
other precious metals, and of the metals traded on the
Aluminium Copper Lead Nickel Tin Zinc
LME since early 2009 was the low returns available on
1999 774 790 176 47 9 279
financial assets of all types. Given the continuing strong
2000 322 357 131 10 13 195 growth in Chinese demand the prices of early 2009
2001 821 799 98 19 31 433 appeared unsustainably low. Figure7.15 shows the
2002 1241 856 184 22 26 651 monthly average US Federal Funds rate since January
2003 1423 460 109 24 14 740 1999. Allowing for inflation rates these were negative in
2003 - 2004 and again from early 2009 onwards.
2004 695 49 40 21 8 629
With prevailing levels of interest rates buying metal
2005 644 92 44 36 17 394
futures, or even physical metal, appeared an attractive
2006 698 191 41 7 13 90 option for a wide range of financial organisations. Yet
2007 929 199 45 48 12 88 the rise in prices of both the mid-2000s and 2009 - 2010
2008 2338 341 45 79 8 253 was based on far more than speculative investment.
2009 4624 502 147 158 27 489 That rarely affects the level of prices for an extended
period because of the possibilities of inter-temporal
2010 4275 378 209 137 16 701
arbitrage, although it can affect the timing of price
2011 4979 372 352 91 12 820 movements.

Mineral Economics 101

 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector

7
There is asymmetry between prices in recessions and
6.5
6
boom times. When markets weaken, as in the 2001 - 2002
5.5 recession and again in 2008 - 2009, the marginal costs of
5
existing producers set a flexible floor to prices. In boom
4.5
4
times, such as 2004 - 2007 and 2010, when markets
Per cent

3.5 tighten and capacity is limited there is no ceiling to

3
prices, which can rise sharply. The duration of such
2.5
2
price spikes will depend on how rapidly additional
1.5 capacity is created, on the ease of substitution, and on
1
the behaviour of economic activity.
0.5
0 Supply bottlenecks were common throughout the
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
minerals industry in the mid-2000s, but they affected
Fig 7.15 - United States Federal Funds rate, monthly averages, 1999 - 2012 different products to varying degrees. A trend of
(source: US Federal Reserve). falling real prices into the early years of the decade
had concentrated companies attention on cost cutting
Figure 7.16 shows how year-on-year changes in the rather than investment in new capacity. Rising demand
LME index of non-ferrous metal prices moved with ran against capacity limits, not just at mines but in
changes in the industrial production of the advanced the accompanying infrastructure. Suppliers of capital
economies. Given that a rising share of demand is taken equipment and services to the mining industry were
by other economies the close relationship between the just as affected. In some instances supply responded
two held up well throughout the decade. relatively rapidly to rising demand, but in others
the necessary investment was slow to materialise.
100 25
In many sectors after-tax profitability did not rise
80
LMEX (left-hand scale)
20 commensurately with prices because of steeply rising
60 15 costs and increases in governmental shares of mine
40 10 revenues through fiscal and other changes. The GFC of
20 5 2008 - 2009 brought many projects to a shuddering halt
0 0
when sources of external funding dried up and there
-20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-5
was great uncertainty about future demand. Although
many projects were reinstated when prices and demand
-40 -10

Industrial production
-60
(right-hand scale)
-80 LMEX Industrial production
-100
Fig 7.16 - Percentage changes in the London Metal Exchange index of non-fer-
rous metal prices and advanced economies industrial production, 2000 - 2011
(sources: International Monetary Fund 2012 and London Metal Exchange 2012).
The behaviour of the prices of products that are not
traded in terminal markets, such as many minor metals,
industrial minerals, and bulk minerals, including coal
and iron ore, was similar to that of those that are.
Speculative investment, although by no means absent,
revived in late 2009 and 2010 they are slow to start
-15
production.
-20
Figure 7.17 compares yearly index numbers of prices
-25
of thermal coal, iron ore, gold and some metals. Copper
and zinc made the running in 2006 - 2007, but their prices
fell back in 2008 - 2009. Aluminium, whose capacity has
more than kept pace with demand, remained largely
immune to the decades price surges. Zinc markets
remained subdued in 2010, but copper prices climbed
to new peaks. The increases in coal prices outstripped
those of copper, although demand was badly knocked
1500

is far more difficult and costly, and much less common

1400
Thermal coal
1300

in these products. Prices of coal and iron ore greatly 1200 Iron ore spot China

benefited from Chinas burgeoning demand, but their

1100 LME copper
1000
Index numbers 2000=100

LME zinc
prices during recent years should be judged against 900
LME aluminium
their lacklustre performance for much of the preceding
800

700 London gold

decade. Whereas the non-ferrous metals are priced on 600

terminal markets, which provide both opportunities

500

400

for hedging price risk and a market of last resort, 300

producers of bulk minerals have neither. Until recent

200

100

years, demand grew relatively slowly and producers 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

were fairly reluctant to invest in capacity in anticipation

of future sales. In consequence the 2003 - 2004 spurt Fig 7.17 - Index numbers of prices of thermal coal, iron ore and non-ferrous
in demand created supply bottlenecks and suppliers metals, re-based on 2000 = 100 (sources: International Monetary Fund 2012
seized their advantage by sharp price rises. and London Metal Exchange 2012).

102 Mineral Economics

 chapter 7 Mineral markets, prices and the recent performance of the minerals and energy sector
and prices weakened in 2009. As noted earlier, prices
of gold have risen almost uninterruptedly, but spot
prices of iron ore have shown the greatest increases.
Contract prices lagged but have largely caught up with
the change to market-based pricing.
Copper and iron ore have been the most affected by
capacity constraints. Infrastructure improvements, mine
expansions and new capacity are under construction
that will improve the market balance within a few years.
Some influential commentators suggest that prices may
have peaked, not just because of rising supply, but also
because of a slackening of Chinas growth rate and a re-
balancing of its economy towards consumption rather
than investment. Meanwhile, the advanced economies
face a prolonged period of readjustment and sluggish
economic activity after the financial excesses of the
past decade. Rising oil prices may have had a muted
impact in the mid-2000s, but that does not mean that
will always be the case. The profitability of the minerals
industry depends on the ratio between prices and
costs, and costs are likely to rise at least as fast as, and
probably faster than prices over coming years. The one
clear lesson of history is that even apparently well-
entrenched trends do not continue indefinitely. The
future remains uncertain.
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103