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What’s hot, what’s not and why?

- By: John P Sykes
Posted in: Blog, Commodities, Conferences, Mining, Travel


At the recent ITRI International Tin Conference, metals and mining consultancy CRU Group presented an update of its “Commodity Price Climate Change” forecast. This has nothing to do with which commodities would benefit from an anthropogenically warmed planet (we’ll cover that another day), but is a way of summarising their views of whether commodity price outlooks will be “hot”, “warm”, “cool” and “cold” from now until 2012.

Greenfields observes that in general whilst good demand prospects lead to higher medium and long term prices, for a commodity to become a true hot prospect the positive demand signals must be combined with supply side issues. The miner that can spot potential supply problems looming in a commodity stands the best chance of been well positioned for the next boom.

Below we’ve summarised which commodities CRU has classified as “Hot”, “Warm”, “Cool” and “Cold” combined with my thoughts on why I think they’ve done this. What do you think?


Tin – robust demand especially from consumer electronics and major supply-side issues – depleted reserves, lower grades, sovereign risk, few new projects and issues with conflict tin from the D.R. Congo to a name a few! I discuss these issues in depth in my SE Asia Tinbelt field notes and my report on the ITRI International Tin Conference.

Uranium – the price is currently depressed but new reactors will stimulate demand, and there is a lack of new supply as inventory stocks are run down. The industry may have to pay for a lack of exploration expenditure over the last decade or so. Uranium mine projects are likely to face significant regulatory hurdles and local unrest wherever they are built. Some of these issues were highlighted in my February uranium report.

Iron Ore – prices rebounding as economies recover, supply will remain constrained until new projects come on stream (after 2012). Huge financial and infrastructure obstacles exist in the industry, particularly in breaking new ground in West Africa. Widespread large-scale development of magnetite deposits has yet to prove majorly profitable. The new pricing mechanism led by BHP Billiton seems likely to drive prices up further, whilst further industry consolidation might attach a premium to prices.

Met Coal/Coke – mainly used in steel production, so tracks this highly cyclical sector, which due to industrialisation in China and India is definitely on the up. On the other side of the equation supply increases from China may be stuttering.

Tungsten – recovering after the collapse of the USSR in the early 90s flooded the market with high cost stockpiles, these have finally been worked through. China is now the big story, as the main producer and consumer – Chinese demand for tungsten to make hard alloys continues to soar, whilst environmental measures and export restrictions will reduce Chinese production. Tungsten supply from the D.R. Congo is likely also to be restricted by new conflict minerals legislation.

Copper – key infrastructure metal, used intensively in the industrialisation of China and India combined with a lack of new supply coming on stream due to higher capital costs and project located in ever riskier countries. It is also somewhat of a bellwether for the LME base metals so attracts a lot of investor confidence.

Palladium – supply-side tightness in South Africa, rising industrial demand, particularly in the beleaguered auto sector, which is taking off in China and India. Environmental measures in these countries may also increase the adoption of catalytic convertors. On top of this substitution in the auto sector may occur, as companies change down from the higher priced platinum where possible. Possibly also to benefit from jewellery substitution as people trade down from high cost gold. Palladium is a component of ‘white gold’.

Nickel – related to stainless steel cycle, so should benefit as stainless steel demand recovers. Nickel-metal hydride batteries used in hybrid cars also provide a nice story for investors, whilst plans for more austenitic stainless steel hungry nuclear power plants may also provide a little drive to demand. There are also supply-side issues – CRU is obviously expecting widespread failures and delays to nickel laterite projects in the pipeline, which would otherwise have the capacity to flood the market. Quite what is going on at Norilsk Nickel remains unclear so Russian production may stumble in the medium term.


Steel (Global Rebar Index) – the steel cycle will be closely tracking industrialisation in China and to a lesser extent India, providing a bullish demand argument. However, greater steel production capacity (much of which was idled in the downturn) and expansionist steel mill plans in China mean that supply is likely to be able to track demand somewhat.

Urea – not a metal, or indeed even a mined commodity, so we are really dancing on the edge of my ignorance here! I do know most urea is consumed in nitrogen fertilisers and as China and India industrialise and become more middle class food demand and therefore agricultural production and fertiliser use will go up. Unlike mined commodities urea is manufactured so does not face the same challenges in developing new capacity and it is probably this stopping it being a hot commodity.

Aluminium – large inventory stocks built up in 2008 and 2009, but the build seems to have peaked, and the metal with its multitude of industrial uses is likely to see with strong demand particularly from the Chinese, but also partly due to an industrial recovery in the Western world. Eating through the inventory will hold prices down a little, whilst a significant of idled smelter capacity can come back onstream, so together these factors will stop the metal being classed as hot.

Ammonia – Again not really my field, but again this a fertiliser commodity that is likely to see the benefits of, quite literally, an increased appetite in China and India. Like urea though, ammonia is a manufactured commodity whose capacity can more easily track demand so supply-demand gaps tend not open up as frequently as occurs with mined commodities.

Gold – CRU must be seeing a shaky economy for a little while into the future yet, resulting in plenty of safe haven buying. This is probably reflective of an east-west split, with the industrialising eastern world driving industrial metal demand, but a wobbly developed western world making investors uncertain back at home. The gold market doesn’t operate like other metals, with the physical supply-demand balance not really being the determining factor in prices so potential supply issues (labour and electricity) associated with South African supply are unlikely to be that important.

Alumina – linked to aluminium demand so expected to somewhat track the metal. A significant trimming in global aluminium smelting capacity means the raw materials and primary metal markets haven’t detached as much as in copper, tin or iron ore. Supplies of bauxite to make alumina are essentially inexhaustible though there are the occasional problems at mines, especially in more unfriendly jurisdictions.

Platinum – supply-side tightness, with increasing uncertainty surrounding the mining sector in South Africa, where most of it is produced. Rising industrial demand from the auto sector, combined with environmental measures in China and India may increase the adoption of catalytic convertors. Substitution, however, looms heavily in the platinum industry. Whilst platinum may benefit from substitution down from gold in the jewellery sector, platinum itself may also suffer from substitution into cheaper palladium jewellery. In general though platinum jewellery still seems in fashion. The metal is increasingly facing a substitution attack in the auto sector as well, as thriftier car manufacturers seek to use palladium where possible. A platinum-palladium alloy can now be used in diesel car catalytic convertors instead of the pure platinum version previously required. Although the South African mining sector is uncertain, reserves of platinum from the Bushveld are essentially limitless (though at what cost remains uncertain).


Lead – One of the LME’s “sick pair”. Stockpiles built up in 2008 and 2009, particularly in China, and are the highest since 2002. Demand is still stable for car batteries, but the market is well supplied and does not excite investors. Its toxicity means industry will continue to seek ways not to use it. Lead contamination issues in China and at Mt. Isa, Australia will continue to hang over the metal, but may in the end cause a bit of a supply shortage. Teck also seems to face regulatory hurdles for its planned new capacity in the US. Lead is increasingly a by-product metal so supply is linked to zinc supply and with very poor demand prospects for that metal, lead supply may be held down.

Molybdenum – possibly suffering a little following listing on the LME as the metal loses some of its “opacity premium”. The majority of contracts are however still individually negotiated and the lower prices negotiated over the last year will be locked in for a bit yet and will slow price increases. On the supply side, a lot of capacity is about to restart in North America that was shut at the end of 2008. In the longer term, if any of the large copper porphyry expansions or projects come on stream in South America, the market could easily be flooded. Assuming the “hot” copper forecast is partly due to these projects being delayed or not happening, one can assume the molybdenum market won’t be flooded either, so a “cold” future seems unlikely.

Bauxite – as ever there’s lots of it around and it’s cheap and easy to mine. Only the lowest cost operations survive, and these need to be very, very big, as such the market has probably become a little oversupplied, with little small scale marginal capacity to trim away in response to the falling demand seen in 2008 and 2009. Increased recycling of aluminium, which is less energy intensive for smelters, means that bauxite demand may decouple from aluminium demand and not be quite as warm a market.


Vanadium – Like molybdenum, vanadium’s price fall in 2008 was severe and it will take a substantial demand pick up to turn sentiment on this metal positive. Demand is not likely to pick up as strong as steel, for which most vanadium is used. Steel used in the developed world is more vanadium intensive than that used in China, so steel demand driven by China, whilst demand in the Western world remains moribund means vanadium would most likely underperform steel. Vanadium remains very substitutable for its uses in steel as well. Vanadium producers responded to falling prices by taking production capacity off line, but this means there’s plenty of excess capacity to come back on stream yet, holding down prices. Produced as a by-product or various types of mining and steel production means there is no shortage of supply options.

Phosphate – phosphate fertilisers were stockpiled in late 2008-early 2009, in response to a glut of cheap sulphuric acid, whilst significant supplies of phosphate rock also built up. US consumption of phosphate rock reached a near 40-year low. This inventory of fertiliser and rock still needs to be worked through. There are substantial production increases planned, with new mines opening in Australia and Peru, and planned for Namibia, and Saudi Arabia, combined with planned expansions of current operations in several countries. Phosphate can also be produced from organic deposits, but these deposits in general are depleted. The increased demand for fertilisers as the large Asian economies grow wealthier and eat more it seems will not override this glut until beyond 2012.

Silver – Always a difficult metal to make money out of mining. Usually mined as a by-product of either gold, copper or nickel, all of which are metals with very bullish stories mean silver can quite easily go into oversupply, making life difficult for the primary producers. Silver is an investment metal like gold, but lacks the excitement which surrounds gold, an alternatives such as platinum or other rare metals are increasingly being considered as alternatives. Silver demand has been undermined over the lack decade or so by the decreasing use of photographic film in the “digital age”, but Greenfields probably wouldn’t be as bearish as CRU on this metal, as we see potential demand substitution as people downgrade from increasingly expensive gold and platinum jewellery and from platinum in the auto-sector (where it can be used in catalytic convertors).

Sulphuric Acid – oversupply due to increased sulphur plant building in China in response to the 2008 record high prices, combined with overcapacity in the copper smelting sector, where acid is produced as a by-product. The glut caused by the price collapse in late 2009-early 2009 meant a lot of unstorable sulphuric acid was converted into storable fertiliser. This inventory still needs working through. There seems to be no shortage of by-product sulphur (from oil and gas refining) either to be made into sulphuric acid.

Cobalt – serious risk of oversupply due to strong copper demand (with which cobalt is often mined as a by-product), which had led to a large increase in capacity in the D.R. Congo. The fact cobalt is mined in the southern Katanga province of the D.R. Congo rather than the troubled eastern region means it will come under less focus as a conflict mineral than tin, tungsten or tantalum, so there is less likely to be price bump attached to this. Trading on the LME which started earlier this year means much of the mystery surrounding the trade of this metal may be lost over the next few years and as such its “opacity premium” may disappear. Long term uses in the battery and pigment sectors seem to be dwindling as substitution bites.

Zinc – The other of the LME’s “sick pair”. The market is oversupplied – stocks are at record highs and there have been few cutbacks in mine supply. Widespread closures of aging mines are not expected until beyond 2012.

Sulphur – Still suffering from weak fertiliser demand, due to the stockpiles built up in late 2008-early 2009, as something had to be done to get rid of the unstorable sulphuric acid. As well as primary sources of mined sulphur, there is substantial by-product sulphur production from the oil and gas industry. As demand and the price of oil and gas increases, more high-sulphur oil and gas will be consumed, increasing by-product sulphur supply.

What makes the “warm” get “hot” and the “cool” go “cold”?

Looking through these commodity summaries a trend emerges (and this is perhaps the underlying theory behind how CRU puts together its forecasts). All of the “hot” and “warm” commodities (tin, uranium, iron ore, metallurgical coal, tungsten, copper, palladium, nickel, steel, urea, aluminium, ammonia, alumina, gold and platinum) have good demand fundamentals, whilst all of the “cool” and “cold” commodities (lead, molybdenum, bauxite, vanadium, phosphate, silver, sulphuric acid, cobalt, zinc and sulphur) have poor demand prospects. This may seem like a simple and rather obvious observation but intrinsically it says demand is the main driver of a commodity price – commodity prices are demand led.

Taking this observation onwards it is noticeable that all of the “hot” commodities (tin, uranium, iron ore, metallurgical coal, tungsten, copper, palladium and nickel) not only have strong demand prospects but supply-side issues. This is in contrast to the commodities that are merely “warm” (steel, urea, aluminium, ammonia, alumina, gold and platinum) which generally have strong demand forecasts but also seem to be having fewer problems on the supply-side, or are indeed possibly have a little excess capacity on the supply side. The result of this is that the strong demand is dampened by the equally strong supply.

The conclusion is therefore that whilst demand may cause the upward trend in prices, it is the lack of supply that causes the price spike. Miners wanting to get in on the next “hot” commodity should therefore look for commodities not just with good demand prospects but also a litany of potential supply problems. We have looked at this intersection of supply chain woes and demand supercycles in a separate article previously.

The opposite situation occurs with the “cool” and “cold” commodities, which as mentioned all have poor demand prospects, but again it is the supply side that determines whether they are merely “cool” or frigidly “cold”. Those commodities experiencing chronic oversupply and poor demand will build stocks and keep prices low and falling for a prolonged period of time – witness the situation in sulphuric acid. The message for miners here is that if you want an easy time, stay away from any commodity that has the potential to go into chronic oversupply. Unfortunately the very commodities that find it difficult to trim capacity to prevent oversupply and going “cold” are the very same ones that struggle to bring on new capacity when required and get “hot”.

Source slide: courtesy of Phil Newman, CRU Strategies, Overview of Metals Markets, presented at the ITRI Tin Conference 2010