By-Monthly Report of the MALAYSIAN CHAMBER OF

For Members Only January February

MALAYSIAN MINERALS & METALS BULLETIN

INSIDE THIS ISGold Market Review Gold News Highlights
Poh Kong: Gold may Hit US$1,500 This

Iron Ore News Highlight

Vale Project May Cost Up to RM14b

Year
No Dip in Gold Demand Don: Use Paper Currency, Not Gold

Dinar

Coal News Highlights

Coking Coal Likely to Top US$300 a

Aluminium News Highlights

Advance SCT Restarts Msian Alumin-

ium Smelting Plant Flood Affects Rios Aluminium Deliveries

Steel News Highlights

Local Steel Companies Face Tough

Tonne Costlier Coal Unlikely to Hit Sino HuaAn BHP Output Drop to Stoke Coal Price Spike Aussie Coal Mines Brace for New Cyclone Threat TNB to Source Coal from All Over the World

Outlook Coal Shortage Not Affecting Local Steel Mills Steel Sector Poised for Re-rating China Steel Output Up Record 9.3% on Higher Demand Merger to Create World No. 2 Steelmaker

Other Minerals/Metals News Highlights

Gold, Grains Stand Out in a Buoyant

Year Rare Earth Export Quota Cut Raises Concern Japan Deep-sea Robots to Unearth

MARKET REVIEW JANUARY

Gold opened the first trading day of the New Year 2011 on the London Bullion Market at US$1,388.50 per oz, which was also the highest price level for the month. However, it was lower than the closing price of December 2010, which was at US$1,405.50 per oz. Gold was traded during the January month between a price range of US$1,319.00 per oz to US$1,388.50 per oz. The average gold price for the month was US$1,356.40 per oz. The gold market was very much influenced by the value of the US dollar throughout the month of January. Gold prices were on a downward momentum throughout the trading month with some technical corrections checking the prices somewhat from sliding further. During the fourth trading week, the strengthened US dollar pressured gold prices to soften even further to record their lowest level for the month, at US$1,319.00 per oz on 28 January. Thereafter, the precious metals prices rebounded to close the

trading month of January at US$1,327.00 per oz.

FEBRUARY
Gold opened the trading month of February at US$1,331.50 per oz. The precious metal was traded during the month within a price range of US$1,328.00 per oz to US$1,411.50 per oz. The average price for February was US$1,372.79 per oz. The gold market continued to be influenced by the value of the US dollar throughout the month. During the early days of the first trading week, gold prices rose further, a follow through from Januarys closing price upward thrust. However, this positive impetus was short lived as prices then slid to record the lowest level of the month at US$1,328.00 per oz on 3 February. Thereafter, gold prices rebounded and rose all the way towards end of the month to record Februarys highest price level of US$1,411.50 per oz on 24 February. The upward momentum, however, was inter-

Table 1: GOLD MARKET OVERVIEW (US$/OZ) London Afternoon JANUARY Low High Average FEBRUARY Low High Average 1328.00 1411.50 1372.79
2

NY Comex

1319.00 1388.50 1356.40

1316.90 1422.60 1362.59

1335.60 1413.70 1375.67

JANUARY & FEBRUARY 2011 GOLD PRICES

Gold News Highlights

Poh Kong: Gold may Hit US$1,500 This Year
Jewellery retail chain operator Poh Kong Holdings Bhd expects the gold price to edge up by some US$100 to about US$1,500 (RM307 to about RM4,605) an ounce this year on pent-up demand from the recovering global economy. The gold price is currently hovering between US$1,300 and US$1,400 (RM3,991 and RM4,298) an ounce. Poh Kong executive chairman and group managing director Datuk Eddie Choon Yee Seeiong said the gold price may climb due to increasing global demand from consumers who are flocking to shopping stores once again due to better economic sentiment. "This would positively impact the company's revenue and profit this year. We will perform better this year compared to last year, in tandem with the country's gross domestic product growth," Choon told reporters after Poh Kong's annual general meeting in Kuala Lumpur yesterday. Choon said the company's 35th anniversary promotions between December 2010 and August 31 this year will entice customers to buy more gold and other precious stone products. Poh Kong made a pre-tax profit of RM15.1 million in the first quarter ended October last year, up from RM13.7 million in the same quarter in 2009. Choon said the company plans to open three more outlets in Peninsular Malaysia this year with an investment of RM3 million each. The money will come from internally generated funds. Out of the three outlets, one will be in Nilai, Negri Sembilan, which is expected to be operational within the first quarter of this year. The locations of the other two outlets have yet to be decided. Poh Kong - Malaysia's largest manufacturer and retailer of gold, jewellery and other precious stones - has a total of 97 outlets nationwide, of which one is in Sabah, commanding a market share of 15 per cent for gold products a l o n e . (Source: New Straits Times, 7 January 2011)

No Dip in Gold Demand

The rising price of gold has neither affected the industry nor its jewellers, said Habib managing director Datuk Meer Habib. Consumption of gold has gone up and sales are looking good. This is because there is a lot of confidence in gold right now, not just as an ornament but also in bars, he said. Meer Habib thinks the price for the precious metal currently traded at US$1,400 per ounce will only continue to rise and may reach up to US$1,750 per ounce by next year. Habib is currently selling five gram and 100g bars made of gold from a refinery in Switzerland. Apart from gold, Chinese New Year shoppers next best buy will be certified diamonds. Malaysia is one of the best places to buy diamonds as our overhead tax is not too much. There is also renewed confidence in the gem, Meer said, adding that Habib was the exclusive agent for the Hearts on Fire diamonds, deemed the most perfect cut diamonds in the world. He added that people should take advantage of the curent market prices before it is reviewed again. Habibs Chinese New Year promotions this year which takes on the theme Eastpiration, celebrates the Asian heritage. The inspiration for the campaign celebrates glamour, fashion and style while developing iconic beauties such as Habibs Diamond Fest girls. Classic Shanghainese calendar girls are the basis of the Eastpiration concept though Habib has contemporised it to make it more relevant and fashionable. As part of the promotions, they have also come up with rabbitdesign pendants as well as other animalinspired jewellery items such as bracelets. The campaign which is set to run until Feb 20 was launched via an exhibition at Suria KLCCs concourse that ends on Jan 16. Customers will get to enjoy up to 70% discount on all diamond and gemstone jewellery, less RM6 per gram for 916 gold and more during the exhibition. (Source: The Star, 15 January 2011)

Don: Use Paper Currency, Not Gold Dinar

Islamic countries should continue to use paper currency instead of gold dinar, said professor of comparative economic history at International Centre for Education in Islamic Finance Dr Murat Cizakca. History had shown that the return to coinage system could increase interest rates and inflation would be difficult to control, he said. Speaking at a public lecture on Islamic Gold Dinar: Myths and Reality organised by Association of Chartered Islamic Finance Professionals and Inceif yesterday, he said money should serve as a medium of exchange, not as a commodity. We need to continue with paper currency, and the central banks controlling paper currency should have full autonomy, he said. He added that gold supply was dominated by non-Islamic countries. The gold dinar will be exposed to speculation as the gold price also has its ups and downs. Islamic countries should continue to use paper currency and increase trade among each other, he said. (Source: The Star, 18 January 2011)

last year the incorporation of Advance SCT (M) Sdn Bhd in Johor Baru to start smelting activities in Malaysia to produce aluminum ingot. According to its website, Advance SCT Ltd, through unit TTM Industries (M) Sdn Bhd, currently operates two furnaces in Port Klang, with a 60,000-tonne annual capacity for converting second-grade copper scraps to copper coils. The company also announced yesterday that it had secured an exclusive contract to supply at least 1,000 tonnes a month of first grade copper scraps to China-based Qing Yuan Shengli Copper Material Co Ltd. At todays price of copper, the contract could potentially add more than S$150mil to the companys revenue in 2011, it said. (Source: The Star, 1 January 2011)

Flood Affects Rios Aluminium Deliveries

Rio Tinto Group, the worlds third-largest mining company, declared force majeure for aluminium supplies from its Alcan units Boyne Smelters Ltd due to severe flooding in Australias Queensland state. The floods have cut road and rail access between Gladstone and Brisbane and the Brisbane port is closed, preventing deliveries to some domestic and international customers, Rio said in a statement to the Australian stock exchange yesterday. Force majeure is a legal clause that allows a company to miss deliveries because of circumstances beyond its control. An area bigger than Texas and California making up more than 75% of Queensland state has been declared a disaster zone after Australias worst floods in 50 years. London-based Rio was investigating alternative transport options, including shipments out of Gladstone port, it said. The company was unable to provide an estimate on the full impact of the disruption or the duration of the declaration, it said. Rios coal unit on Dec 29 declared

Aluminium News Highlights

Advance SCT Restarts Msian Aluminium Smelting Plant
Advance SCT Ltd, one of Singapores largest traders of aluminium, copper and stainless steel scraps, has restarted its aluminium smelting plant in Malaysia last month through wholly-owned subsidiary Advance SCT (M) Sdn Bhd, it told the Singapore Exchange yesterday. The smelter would produce 200 tonnes to 400 tonnes of aluminium ingots a month in 2011, it said. It announced in May

force majeure on sales contracts from mines in Queensland because of the flooding. (Source: The Star, 14 January 2011)

Steel News Highlights

Local Steel Companies Face Tough Outlook
Local steel players will continue to face tough market conditions in 2011, with increasing competition from regional and China-based steel players. The implementation of the Asean Free Trade Area (FTA) and AseanChina FTA, which started in January last year, had these other steel players ramping up their capacities to take advantage of the new markets. The Asean-China FTA is to date the worlds largest FTA, set to liberalise billions of dollars in goods and investments covering a market of 1.7 billion consumers. Furthermore, prices of major raw materials like iron ore, coking coal and scrap metal are expected to rise this year, in view of the continued oligopoly by top global iron ore producers Vale SA of Brazil, BHP Billiton and Rio Tinto Group as well as the short supply of coking coal and scrap. The three mining companies hold considerable bargaining clout, controlling two-thirds of the US$88bil global seaborne iron ore trade, said Malaysian Iron and Steel Industry Federation (MISIF) president Chow Chong Long. Between now and the middle of this year, iron ore price is expected to trade at between US$170 to US$180 per tonne free-on-board (FOB) compared with last years average of about US$144 per tonne FOB. The focus will be on the trading of spot iron ore price this year. It will be on an uptrend but prices are not likely to escalate by 50%-80%, like what was experienced in 2008, he added. Chow told StarBizWeek that local steel players should continue to explore new markets

like the Middle East, Vietnam and Indonesia rather than focusing on traditional markets like Europe or the US which were still grappling with their economic recovery. The Middle East economy is picking up especially with the rise in crude oil prices while Vietnam and Indonesia are expected to have good sustainable growth in steel consumption, he added. He noted that recent global developments such as the quarterly price increases in iron ore, deepening euro sovereign debt crisis, potential slowdown in China as well as rising costs from the removal of subsidies in Malaysia, had severely affected local steel companies. Exacerbating the problem is the fact that these steel companies have become increasingly export-driven. Malaysia exports about 2.5 million tonnes of steel products, especially long-steel products, annually to Asean countries. Of the long-steel products exports, billet is the largest item, representing 603,890 tonnes in 2009. According to Chow, Asean steel players including those from Malaysia are fast losing their indigenous identities due to the implementation of the Asean FTA, Asean-China FTA and other FTAs in the pipeline. Asean steel producers are already facing a difficult situation with the flooding of steel products from China into the Asean markets. Chinas ability to export steel products at much lower prices compared with their Asean peers had lately brought not only complaints but also threats of trade and other dumping actions, he said. However, on the local front, Chow expects domestic steel consumption to improve by the second half of this year. Most of the projects under the Governments Economic Transformation Plan are expected to be rolled out in the second half, including the proposed RM36bil Klang Valley mass rapid transit (MRT), he added. In its latest sector report, AmResearch said: The Federal Governments renewed push on infrastructure spending and urban renewal spur domestic steel consumption. Maiden contracts for the Klang Valley light rail transit extension works

could be dished out by year-end, with the larger MRT works poised to kick off beginning 2011. Also on the cards are the construction of six new highways, in addition to several mega developments in the pipeline such as the RM26bil KL International Financial District, it said. (Source: The Star, 1 January 2011)

said an analyst. However, OSK Research steel analyst Ng Sem Guan said in a recent report that steel product prices were expected to soften slightly in the coming weeks largely due to a slowdown in construction activities in view of the upcoming Lunar year celebrations. Thus this (higher-priced products) may not significantly benefit local mills for now, he said, without giving estimations. As a result, he is keeping a neutral stance on the sector. Meanwhile, another analyst said local steel companies were poised to benefit in the long term from the implementation of mega construction projects under the Economic Transformation Programme (ETP). The construction sector will be in a better position to absorb any additional cost as construction players themselves will be able to factor in the higher cost when bidding for the projects under the ETP, said an analyst. The ETP aims to transform the nation into a high-income nation. Some of the projects to be carried out include the RM36bil mass rapid transit network and Shell Malaysia's RM5.1bil investment to upgrade or build facilities in upstream, midstream and downstream activities. (Source: The Star, 14 January 2011)

Coal Shortage Not Affecting Local Steel Mills

The reduced supply of coking coal, a key raw material used by steel mills, is not likely to affect local steel makers which mostly use scrap metal in their operations. Australia, which supplies more than half of the world's coal exports, has been hit with massive floods that have hurt the production of the commodity, which is mostly sold to Asia's steel companies. However, Malaysian steel makers will still have to contend with slightly higher scrap metal prices. According to some estimates, scrap metal prices have risen following the uptrend in coking coal prices to about US$500 per tonne now from around US$400 per tonne in December. But Kinsteel Bhd chief executive officer Datuk Henry Pheng reckons that the problem in Australia will create a shortage of steel products. With the slowdown in the supply of coking coal, we are expecting a shortage of steel. This bodes well for local producers who don't rely on coking coal as their raw material, he said. Kinsteel uses scrap metal as its main raw material. Pheng declined to comment on how this development would impact Kinsteel's margins. Analysts said the outlook for local steel makers depended on whether they could pass on the slight increase in scrap metal prices to their end customers. The good news is that steel prices are on an uptrend. That bodes well for steel makers, despite their higher raw material costs. If steel prices keep going up, local steel companies could see a positive impact on their margins, notwithstanding the rise in raw materials,

Steel Sector Poised for Re-rating

The steel sector is poised for a re-rating as it will benefit from the massive construction of the mass rapid transit (MRT) system but rising material costs remains a huge risk to the sector. Hwang DBS issued a report on the sector yesterday saying all steel companies would benefit as a result of the MRT project, which is estimated to cost more than RM36bil, making it one of the largest construction projects undertaken in the country. Construction work for the MRT, which is targeted to start in July, should spark demand momentum and improve steel prices, HwangDBS said in the report. All companies will benefit, the research house said, but

added that there were two risks, namely the rise in costs of raw materials like iron ore, scrap metal and coking coal as well as delay, if any, in the execution of the MRT project. The Malaysian Iron and Steel Industry Federation (MISIF) president Chow Chong Long shares the same view. Demand for steel will be especially good in the second half of the year when the MRT project kicks off, he said. In the first half of the year, steel prices would largely be driven by speculative buying, given the recent flood problems in Australia, which have hurt the production of coking coal , thus potentially resulting in a tight supply of steel. People will buy more than they need in the first half simply because they fear a shortage due to the conditions in Australia, this will artificially drive up steel prices, he said. Australia supplies more than half of the world's coal exports. Nevertheless even as demand increases, the prices of raw materials, such as iron ore and scrap metal, which are the two main materials used by local steel millers, are also increasing, tracking the rising costs of coking coal, Chow warned. For example, the price of scrap metal was about US$400 per tonne before Christmas last year, and it was now about US$570 per tonne, up 43%, said Chow. Whether the price of steel will continue to go up will depend on whether the costs can be passed on to customers. As it is, the price of steel was still behind the increase in raw materials, up 25% in the same period to about US$2,500 per tonne now, he added. (Source: The Star, 18 January 2011)

reau of Statistics said in a statement. Output gained even as the government moved to rein in property speculation from April and cut power supplies to mills in the fourth quarter. Output fell every month from June through September, Bloomberg data shows. Still, economic stimulus policies and rising incomes spurred vehicle sales, boosting demand for steel used in automotive body sheets and parts. China also spent about 700 billion yuan (US$106b) on railroads. Steelmakers were producing at full capacity in the first half of last year, sending output to a new record, said Hu Yanping, a Beijing-based analyst with researcher UC361.com. This quarter, steel production may further rise with restored power supplies. The increasing supply of social housing and development of machinery will drive growth of steel demand. The government plans to almost double the 2011 supply of affordable housing from 5.8 million units in 2010 as it introduces more measures to curb property speculation, Premier Wen Jiabao said in a radio broadcast on Dec 26. Crude steel output rose 6.3% to 51.5 million tonnes in December from a year ago, the statistics bureau said yesterday. This was 2.6% higher than 50.2 million tonnes in November. Benchmark Chinese steel prices have risen to 4,796 yuan a tonne as of Wednesday, the highest since Sept 26, 2008, according to the Beijing Antaike Information Development Co. Chinas steel output may increase to 661 million tonnes this year, UBS AG Analyst Hubert Tang said at a media briefing in Shanghai this week. Chinas steel demand may peak at 744 million tonnes in 2015, Tang said. (Source: The Star, 21 January 2011)

China Steel Output Up Record 9.3% on Higher Demand

China, the worlds biggest steel producer, boosted output by 9.3% to a record in 2010, driven by demand from automakers and railway builders. Crude-steel production rose to 627 million tonnes last year, the National Bu-

Merger to Create World No. 2 Steelmaker

Japan's Nippon Steel Corp and Sumitomo Metal Industries plan to merge to create the world's second largest steelmaker as they battle tough competition from Asian rivals and

shrinking demand from domestic automakers. The deal, which would likely see Japan's top steelmaker Nippon Steel acquiring Sumitomo Metal, valued at US$11 billion (US$1 = RM3.04), comes as the industry grapples with surging prices for steelmaking ingredients iron ore and coking coal. "The new group has a chance to become very competitive in Asia," said CLSA analyst Jeremie Capron. "The merged company will have the best product line-up in the industry ranging from construction steel, auto steel sheets, thick plates to seamless pipes. That's quite unique, and the No.1 company, ArcelorMittal, does not have such a product line-up." Japanese steelmakers have been hard hit as domestic automakers such as Toyota Motor Corp and Nissan Motor Co build fewer cars at home and expand in emerging markets such as India using steel from local producers. They also face cut-throat competition from South Korea's Posco and Baoshan Iron & Steel Co, as Japanese automakers seek lower prices to weather an unfavourably strong yen. The deal, welcomed by Japanese government officials and politicians, is subject to review by Japan's antimonopoly watchdog, the Fair Trade Commisssion. "I think an important decision has been made in terms of growth strategy. "This is the first inspiring piece of news in a long time," Katsuya Okada, secretary-general of Japan's ruling Democratic Party of Japan, told a news conference. Consolidation has long been seen as necessary for Japan's steel industry, which has five blast furnace makers, compared to South Korea's two. Nippon Steeland Sumitomo Metal Industries said they aimed to merge in October 2012. The merged company would rank No.2 in the world, with a combined crude steel output of 47.8 million tonnes last year, Sumitomo Metal Industries President Hiroshi Tomono said at a news conference in Tokyo. That would still be about half the production of top-ranked ArcelorMittal but place the group ahead of Baosteel. Based on 2009 crude steel production, Nippon Steel ranked

fourth in the world and Sumitomo Metal placed 19th, according to the World Steel Association. Nippon Steel, with a market capitalisation US$24 billion, and Sumitomo Metal already hold minority stakes in each other. They have not hired financial advisers and have yet to decide on the merger ratio and other conditions of the deal. (Source: New Straits Times, 5 February 2011)

Iron Ore News Highlight

Vale Project May Cost Up to RM14b
Brazilian mining giant Vale International SAs construction costs in its iron-ore transshipment project will be between RM9bil and RM14bil over a five-year period, and the project will likely start in July or August this year, said Perak Mentri Besar Datuk Seri Dr Zambry Abdul Kadir. Vale has received the necessary planning and statutory approvals. It is now in the midst of drawing up the engineering plan. While the Perak government has no equity participation in the project, it will participate in the port and logistics operations. There will also be co-sharing with local companies on the downstream activities. The multiplier effect of the downstream activities is expected to triple Vale's initial investment. Vale has agreed to bring more economic growth along that area. Local companies will be subcontracted to participate in the trickledown activities. They will include Malaysian companies involved in iron ore, steel, fabrication, shipbuilding, canning and tin, Zambry said. Under the project, Vale will develop an ironore complex, including its own jetty in Teluk Rubiah, Lumut. Zambry said this would serve as an impetus for the development of iron ore and steel-related industries. This will be Vale's largest factory outside Brazil. All the necessary acquisitions have been made; it is

just a matter of coming out to do it now, he said. He said the shipbuilding activities would take place along the beachfront from Lumut to Bagan Datok. Some of the local shipbuilders may build the smaller ships to transship the iron ore in the latter phase, Zambry said. The first of the two-phase Vale project will create jobs for 1,000 skilled workers. Over the entire two phases, Zambry said, jobs would be created for 3,000 skilled workers and a few thousand unskilled workers. The figures do not include the spinoff effects from the downstream activities. The Perak State Dvelopment Corp has started drawing up a value-chain roadmap based on the presence of the Vale project in Malaysia. We will identify and promote foreign and domestic direct investments using the project as a base, Zambry said. (Source: The Star, 21 January 2011)

Steelmakers were confronted with a threefold increase in annual contract prices to about US$300 a tonne in 2008 after heavy rains and floods affected mining in Queensland. Mills agreed to pay US$225 a tonne for hard coking coal under a three-month accord starting January 1 this year, Bank of America Merrill Lynch analysts wrote in a December 21 report. Flooding has cut output of steelmaking coal by 3 million tonnes and of the thermal variety burned at power-stations by 1.5 million tonnes, according to estimates from Macquarie Group Ltd analyst Colin Hamilton. (Source: New Straits Times, 6 January 2011)

Costlier Coal Unlikely to Hit Sino HuaAn

Rising international coal prices due to the floods in Australia's coal-rich state of Queensland are not likely to have a significant impact on metallurgical coke manufacturer Sino Hua-An International Bhd's plant in China. Besides getting its supply of coking coal from China domestic mines, Sino Hua-An also buys cheaper coking coal in bulk for the winter season. Vice president corporate communication and investors relations Bernard Tan said the company's metallurgical coke plant in Shandong province buys and uses most of its coking coal from mines located in Shandong, Henan and Shanxi provinces. "Every year during winter season in North Eastern China, the normal domestic coking coal pricing trend tends to increase a little as the extraction rate from the mines is usually slower than expected. "As part of Sino Hua-An's contingency plan, we usually increase our coking coal inventory during winter season by negotiating and purchasing cheaper coking coal in bulk from our raw material suppliers," he said in a statement. Sino Hua-An, the first China-based company to be listed on Bursa Malaysia, produces metallurgical coke from coal. Coke is a critical

Coal News Highlights

Coking Coal Likely to Top US$300 a Tonne
Steelmaking coal contract prices may rise to more than US$300 (US$1 = RM3.06) a tonne after the worst floods in 50 years disrupted output from producers including BHP Billiton Ltd and Rio Tinto Group in Australia's Queensland state. Flooding may cut as much as 10 million tonnes of coking coal from the market if disruptions to mining last six weeks, Daiwa Capital Markets analyst David Brennan said in a research note on Tuesday. BHP, Rio, Macarthur Coal Ltd and Anglo American plc are among producers that have declared force majeure, a legal clause invoked by companies when they can't meet obligations because of circumstances beyond their control. Record rainfall has spread floods across an area the size of France and Germany, forcing the evacuation of towns, closing mines and spoiling crops.

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raw material in steel-making. Tan said the company's usual coking coal inventory is about 50,000 tonnes but currently, it is more than triple to 170,000 tonnes. This inventory level is enough for more than a month's use. Coal prices for delivery in March have already risen to some US$130 (RM398) a tonne, from around US$100 (RM306) a tonne at the start of December last year. The floods in Queensland, the worst in decades that has displaced hundreds of thousand people, may temporarily halt production and export of high -grade coking coal and force the international coking coal price to skyrocket to over US$300 (RM921) per tonne in the near future. At the same time, the rising crude oil price exceeding US$90 (RM276) per barrel is working in favour of Sino Hua-An. Tan said the company's two main by-products, which are crude benzene and tar oil, are oil-based. "Therefore, the rising crude oil prices also 'push' up the selling prices of our by-products accordingly," he said. (Source: New Straits Times, 10 January 2011)

ness," Harrington added. "I would expect coking coal prices to go up on this, if only temporarily, until the lost production can be made up down the line." BHP also posted a 4 per cent rise in quarterly output of iron ore from western Australia to record levels. Swelling Chinese demand has driven spot prices for ore to nine-month peaks of close to US$200 (US$1 = RM3.05) a tonne. BHP is the world's largest supplier of sea-borne hard coking coal via a joint venture with Japan's Mitsubishi Corp. Most of Australia's coking coal, which is used to make steel, comes from Queensland. BHP and other miners will likely benefit from this year's price spikes more than in past years after steelmakers agreed to change to quarterly coking coal pricing from annual contracts. The flooding has driven contract prices for coking coal as high as US$225 a tonne for the first quarter of 2011, compared to US$209 a tonne in the fourth quarter of 2010. Spot prices, however, have shot up to more than US$350 per tonne and consultants Wood Mackenzie said prices could reach US$500. This will mean higher second quarter contract prices, based on average daily spot prices over the previous three months. "When combined with disruption to external infrastructure, we expect an ongoing impact on production, sales and unit costs for the remainder of the 2011 financial year," BHP said in releasing its fiscal second-quarter production data, showing coal output dropped 30 per cent versus the previous quarter. That is significantly more damage than the 6 per cent loss in coking coal production close peer Rio Tinto this week said it suffered from the floods. The shortage of coking coal from Australia, which usually accounts for twothirds of global coking coal trade, has forced Asia's steelmakers to look elsewhere for supplies. "If the problems continue more than what we have built (up) in our inventory, it might become overwhelming. The major issue would be securing prices not volumes, meaning a higher cost to us," said an executive from South Korea's No.2 steelmaker,

BHP Output Drop to Stoke Coal Price Spike

Eastern Australia's devastating floods will hit production at BHP Billiton's coal-mining operations for at least six more months, the company said after output in Queensland state fell by nearly a third last quarter. Yesterday's coal outlook was the most detailed the company has released since heavy rains started in November, prompting BHP and other miners to postpone shipments and make force majeure declarations to break sales contracts. Damage estimates are set to rise as the October-December figures do not include the worst flooding in Queensland in January. "Until now there wasn't a peep from BHP about water and flooding and rain or anything in Queensland," said Andrew Harrington, a mining analyst for Patersons Securities here. "It's obvious now that this flooding has had an enormous effect on its coal busi-

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Hyundai Steel. Iron ore is BHP's most profitable division, expected to account for 39 per cent of operating profit in the current financial year to the end of June, while coal is seen making up 16 per cent, according to Bernstein Research in London. BHP shares in London shed 2.0 per cent to 2421.5 pence by 1115 GMT. (Source: New Straits Times, 21 January 2011)

Aussie Coal Mines Brace for New Cyclone Threat

Australias Queensland state, recovering from the nations worst flood disaster, is bracing for a cyclone expected to hit its north-eastern coast within three days, threatening more damage to stricken coal mines. Tropical Cyclone Anthony reformed into a cyclone yesterday and was likely to hit the coast between Mackay and Cooktown tomorrow or Monday, Bureau of Meteorology forecaster Rick Threlfall said in a phone interview from Brisbane. It might reach a category two intensity, out of a scale of one to five, with five being the highest, he said. Queensland coal-mining districts might be affected with storms and heavy rain, he said. Almost two months of torrential rains in the Queensland have killed as many as 32 people, damaged about 30,000 properties, cut rail lines and spoiled crops. Lost coal production might cost as much as A$9.5bil, with 85% of coal mines in the Australian state, the biggest exporter of the steelmaking commodity, impaired by excess water, Queensland Resources Council said on Thursday. Areas of concern at this stage would be the central coalfields area such as Emerald, but pretty much everywhere on that coastal strip and inland could see very heavy rainfalls early next week, Threlfall said. The floods caused BHP Billiton Ltd and Rio Tinto Group to declare force majeure, a legal

clause that allows producers to miss deliveries. The removal of water from pits was likely to be affected by the state governments riskaverse environment regulator, the lack of pumping equipment and water damage, the Resources Council said on Thursday. Steelmakers in Asia may be forced to pay as much as 78% more for three-month hard coking coal contracts starting April 1 after flooding disrupted output, according to Bank of America Merrill Lynch. Queensland has 57 producing coal mines, according to the Resources Council. It might take two to three months for normal operations to resume, the government said last week. (Source: The Star, 29 January 2011)

TNB to Source Coal from All Over the World

National utility firm Tenaga Nasional Bhd (TNB) is "aggressively" sourcing coal from South Africa and Indonesia to overcome a shortage from its traditional supplier Australia, which has been partly swamped with floods. TNB president and chief executive officer Datuk Seri Che Khalib Mohamad Noh said the current situation Down Under is not expected to recover in the next two to three months, preventing some of its suppliers from transporting coal to TNB due to flooding in Queensland. "The situation in Australia has affected us to a certain extent and we are now buying coal aggres-sively from all over the world, including South Africa and Indonesia. We will be sending officials to Indonesia to negotiate a larger supply," Che Khalib told reporters at TNB headquarters in Kuala Lumpur yesterday. Some 30 per cent of TNB's power plants in Malaysia are coal-fired, while the remaining 60 per cent are powered by gas and medium fuel oil. TNB buys coal from Australia because Indonesia needs to use its own coal to power up the country's power plants. At the height of the floods in Australia last

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month, the coal prices had been pushed over US$145 (RM441) a tonne. Prices, however, had eased to over US$120 (RM365) a tonne for the past two weeks due to the end of the winter season and speculative activities. Che Khalib said TNB's net profit is likely to be hurt for its financial year ending August 2011 if coal prices remain over US$100 (RM304) a tonne. Consequentially, its bottom line will dip 16 per cent every time coal prices rise by US$10 (RM30.4) per tonne. The group saw a marginal rise in net profit for the first quarter ended November last year and had warned of greater pressure on its earnings for the rest of the year if coal prices continue rising. Meanwhile, TNB has forged a partnership with Reseau de Transport d'Electricite of France on the transfer of technology and expertise in the energy industry which also includes nuclear. Under a memorandum of understanding (MOU) signed by the two parties yesterday, TNB hopes to gain from the transfer of technology, particularly in the areas of live substation and lines works, the study of interaction of grid characteristics with nuclear plants, gradual introduction and development of smart grid technologies and transmission system outage management. Che Khalib said TNB is particularly interested in the area of live substation maintenance, which is relatively new to the group. "Although the technology of performing maintenance on substation equipment under 'live' conditions is widely practised in most developed countries, it is relatively new to TNB." With the collaboration, TNB engineers and technicians will be able to bolster its capability to maintain substations without the need to switch the power off, like the current practice thus inconveniencing consumers. Che Khalib said TNB has so far trained and certified 15 of its technical personnel in live substation maintenance under a training programme conducted by Reseau de Transport in 2009. He said currently, live substation maintenance works at TNB is in its infancy and being carried out mainly in the Klang Valley area. TNB plans to further intensify its capa-

bility in live substation maintenance to cover more areas, he added. (Source: New Straits Times, 8 February 2011)

Other Minerals/Metals News Highlights

Gold, Grains Stand Out in a Buoyant Year
From gold to grains to oil, commodities finished 2010 at or close to their highest levels in years. Gold closed last Friday at US$1,421.40 (US$1 = RM3.08) an ounce, up roughly 31 per cent for the year after an almost uninterrupted climb since January. Grains and soyabeans capped off a rally that started this summer, and oil prices ended the year at levels many analysts considered unachievable just six months ago. The jump in commodity prices has been driven by China's seemingly insatiable demand for raw materials and speculators betting that they could profitably ride the momentum higher. Analysts expect the price increases, and volatility, will continue well in 2011. "People are looking to get out of the dollar, and stocks have run up so much that commodities are looking like a good alternative," said Spencer Patton, founder and chief investment officer for hedge fund Steel Vine Investments LLC. Gold was the clear standout in 2010. It traditionally has been viewed as a classic shelter investment, often used as a hedge against inflation. That kept it idling for much of the decade before the global financial crisis emerged in 2008. Then, as central banks started taking dramatic actions to stimulate their economies, gold starting moving higher as interest rates dropped to record lows and some currencies fell in value. That led some investors to predict higher inflation is inevita-

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ble. Other precious metals, like silver, also moved higher. "Gold is much more of a universal hedge, and that's why there is more of a dramatic price movement," says Edward Meir, senior commodities analyst at MF Global in New York. Gold should continue to rise well into the second half of 2011, said Rohit Savand, senior commodity analyst with CPM Group in New York. Political instability - such as military tensions on the Korean peninsula - coupled with further stimulus plans and bailouts in Europe mean gold's safe-haven status will keep it in high demand. Industrial metals, used to make everything from computer parts to car engines, also gained as global consumption and manufacturing started to recover. Copper surged more than 40 per cent, rising from just over US$3 a pound to close the year at US$4.45. Meanwhile, 2010 marked one of the most profitable years ever for farmers in the US Midwest. The USDA predicts that net farm income for 2010 will be US$81.6 billion, up 31 per cent from 2009 and about 26 per cent higher than the annual average over the past decade. Farm incomes are likely to keep growing in 2011 on strong commodity prices and export demand, according to a report released on Wednesday by the Kansas City Federal Reserve Bank. Smaller reserves of corn and soyabeans this year couldn't satisfy ever-growing global demand, sparking a price rally over the summer that has yet to abate. Wheat prices also climbed as droughts, fires and heavy rains around the world slashed the amount of grain for harvest. With Russia's post-fire grain export ban likely to remain in place throughout 2011 and European exports expected to be exhausted in January, the US looks increasingly likely to be the supplier of last resort in the coming year, JPMorgan Chase analyst Colin P. Fenton said in a recent report. (Source: New Straits Times, 3 January 2011)

Rare Earth Export Quota Cut Raises Concern

Chinas decision to cut export quotas of rare earths by 35% for the first half of the year, has the West, Japan and other auto and hightech manufacturers teetering on the edge. Accounting for 97% production of the world's rare earth minerals, China sent shockwaves last week when it announced that it wanted to conserve ample reserves and had not decided on the export quotas for the second half of the year. What appeared to be a doubleedged sword is the reasoning that the quotas were necessary for environmental protection and were in line with World Trade Organisation (WTO) rules. It is distressing to note that while working for the common good, countries have come into conflict with one another as environmental protection comes with the other side of the coin, in this case, potential trade disputes. So far, reports indicate that China has refused to grant requests from the US to end these restraints; the US Trade Representative office has warned that they could complain to the WTO, which judges international trade disputes. Sony, maker of the Bravia flat screen TVs, Vaio PCs and the PlayStation 3 video game console, expressed its deep concern over the issue. We cannot welcome rare earth export controls or any restrictions that hinder the system of free trade, Sony was quoted as saying in an e-mail statement to Reuters. Rare earths are used in a number of high-tech applications in semiconductors, mobile phones, laptops while wind turbines and hybrid cars are among the biggest users. According to Reuters data, the US has a large deposit in Mountain Pass, California, at a mine owned by Molycorp. But in the 1990s, China began flooding the market and prices plunged. Between 1990 and 2006, the average price of rare earths fell almost 75%, reported Reuters.

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It is correct to take effective steps to preserve the environment which has become top priority especially for rapidly industrialising countries like China. Numerous rankings of the world's top polluters and constant discussions at international forums have added pressure on these countries to take a serious view of issues affecting climate change and sustainability. But it is preferable if we can avoid hasty decisions especially when so many players worldwide are involved. Some lead time for preparation of supplies elsewhere with a timetable for gradual imposition of quotas will go a long way towards easing this trade friction. Already, the disruption is not only exercerbating the global supply shortfall and price pressures, but also distortions in stock prices. While Molycorp's stock price has nearly quadrupled since its debut in late July at US$14, its rare earth mine is only scheduled to come back on line next year. According to Reuters, the Mountain Pass facility has not mined or milled rare earth oxides since 2002. In early trade last Wednesday, shares of Australian rare earths company Lynas Corp gained over 10%; however, Lynas is aiming to start production only in about a year although it has supply contracts with Japanese traders. (Source: The Star, 5 January 2011)

mother ships will become feasible, despite the huge challenges, the daily said. Japan and its Asian high-tech rivals are scrambling to secure rare earths and other minerals needed for products; from fuelefficient hybrid cars and batteries to cellphones and liquid crystal display televisions. The Jogmec project will focus on seabed volcanoes, where so-called hydrothermal vents belch out minerals, near the Izu and Ogasawara island chain, south of Tokyo, and the south-western Okinawa islands, the report said. Japanese experts believe the bottom of the ocean could also yield precious metals such as silver and gold and supplies of what they see as a potential next-generation fuel methane hydrate, also dubbed fire ice. (Source: The Star, 8 January 2011)

Ministry: Strategic Trade Thwart Illegal Miners

Act Can

Japan Deep-sea Robots to Unearth Minerals

Resource-poor Japan plans to use deep-sea mining robots to exploit rare earths and precious metals on the ocean floors around the island nation within a decade, a media report said yesterday. The state-backed Japan Oil, Gas and Metals National Corp (Jogmec) plans to deploy the remote-controlled robots at depths of up to 2,000m, the Yomiuri Shimbun said without naming sources. Experts believe that as some minerals become scarcer worldwide, exploiting hard-to-reach underwater deposits and pumping them up to

The introduction of a new anti-terrorism law in Malaysia could help curb illegal mining activities. The Strategic Trade Act 2010, under the International Trade and Industry Ministry, requires the export of dangerous items such as cyanide to be registered with the Government from July onwards. Although the Act does not cover imports, illegal miners here are believed to be exporting excess cyanide not needed in their small illegal mining. Gold and silver miners need cyanide, which is not manufactured in Malaysia. Foreign exporters usually sell in bulk 20 tonnes, for example. This is a lot, and miners here usually would break up the quantity to re-export, said the ministrys Strategic Trade Controller Shahabar Abdul Kareem here yesterday. Shahabar said the Government believed the heavy penalties under the Act would deter these activities. Recently, it was reported by the local media that illegal mining was going on in Bau, a former gold mining town, about

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30 minutes from here. Although Shahabar declined to comment on the Bau activities, he said the import of cyanide was already an offence under the Poisons Act 1952, but the new Act would allow authorities another avenue to prosecute those involved. (Source: The Star, 28 January 2011)

Cost of Shipping Dry Commodities Slips

The Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities, edged lower on Friday, while earnings for the Panamax segment rose due to expectations of firmer trade. The index fell just 0.19 per

cent, or 2 points, to 1,043 points, staying at its lowest since January 29 2009. It tracks the cost of shipping key commodities such as iron ore, cement, grain, coal and fertiliser. Brokers said activity was subdued due to China's Lunar New Year holiday, which ends next week. "An increase in cargoes will likely come to the market as Asian players return," said Jeffrey Landsberg, managing director of dry bulk consultancy Commodore Research. Flooding in Queensland and weather-related problems in Colombia, South Africa, Russia and Indonesia have all disrupted coal shipments at a time when the dry bulk market is already finding it tough to absorb growing vessel deliveries ordered before economic turmoil in 2008. The Baltic's capesize index was 0.08 per cent higher, but average daily earnings stayed weak, dropping US$55 to US$5,161 (US$1 = RM3.04), staying negative for a seventeenth session and at its lowest since December 10 2008. Capesizes typically haul 150,000 tonnes of cargoes such as iron ore and coal. Brokers said buying of freight derivatives contracts had helped buoy Panamax sentiment. "Gains in the Panamax market are possible next week as operations at Australian coal ports and mines have improved," Landsberg said. "Panamax vessels that left various northeastern ports in anticipation of tropical Cyclone Yasi will be returning. Global coal demand remains strong and Panamax congestion is likely to increase at major Australian coal ports." Landsberg said rates for other vessel classes including capesizes was expected to remain flat. The Baltic's Panamax index rose 2.82 per cent, with average daily earnings rising US$297 to US$10,786 in the first gain since January 11. Panamax vessels usually transport 60,000-70,000 tonnes of cargoes of coal and grains. "The week in the Atlantic ended on a slightly more positive note with the market appearing to have reached a floor," Braemar Seascope said. Braemar said Panamax rates on some routes in the Pacific had staged a rebound. "It remains to be seen for how long such a trend can be sustained as

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this area is still fragile," it said. Rates for smaller supramax vessels were expected to fare better in the coming weeks as they were able to diversify their cargoes to other commodities such as sugar and grains. The Baltic's supramax index fell 1.0 per cent. While there are indications of some vessel cancellations and delays, analysts expect deliveries to gather pace between 2011 and 2012. "The market will continue to come under significant supply-driven pressure," Landsberg said. (Source: New Straits Times, 7 February 2011)

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