A Melman Minute
By: Leonard Melman
One of the most troubling developments for the
junior mining industry of late has been the substantial decline in prices for
the base metals group over the past years. We noted these declines recently, but
it is worth reviewing them once again in this space to demonstrate just how
dramatic they have been. From their historic highs to the quotes as of this
morning, here are the price changes for copper, nickel, zinc and lead:
|
Commodity |
Record High |
Today's quote |
| Copper |
$4.10 |
$3.89 |
| Nickel |
$25.00 |
$9.92 |
| Zinc |
$2.05 |
0.87 |
| Lead |
$1.75 |
0.80 |
A - All prices US$
B - High prices taken from charts and are estimates |
From our point of view, the most interesting feature of these declines is that
the bulk of the falls came during a period of time when the world "knew" that
the demand for those metals was growing relentlessly, thanks to continual
expansion of the Asian economies in particular, and that expansion would enable
several billion people to escape poverty and improve their lives through the
addition of modern appliances, communication units, entertainment devices, etc.
Given that this would constitute an unprecedented new demand, requirements for
the base metals "had to" rise and prices should remain high for some time to
come.
While the argument appeared sound, the markets apparently were not convinced and
began to sell off steadily and, with these declines, potential profitability of
some projects has diminished and for others, it may have vanished entirely.
An important theory of market analysis is that markets can collectively
anticipate the future better than individuals and it appears that may have been
the case once again as we are now being inundated with news items that the
decline in the world's economies may be deeper than anticipated and that it may,
in fact, bring about a reduction in expectations of future growth for China,
India, Russia and Brazil - among others.
A combination of important factors such as the subprime debacle, the
international contraction of world credit, the huge declines in real estate
prices and the phenomenal rise in oil and gasoline consumer costs are beginning
to wreck havoc on economic expectations worldwide.
In the United States, the Conference Board's Consumer Confidence Index for June
plunged to only 50.4 from the month-earlier figure of 58.1 and consumers' future
expectations index fell to the lowest level in forty-one years! Home prices, as
mentioned yesterday, are plunging at historic rates, robbing millions of
billions of dollars worth of home equity - and all the Fed's and governmental
remedy measures have proven to be ineffective and perhaps even harmful as the
U.S. Dollar appears to be resuming its plunge.
Major automakers Ford and GM are in real trouble as the market for their most
profitable vehicles, SUVs and pickups trucks, has evaporated due to fuel prices.
Their vehicle production rates are plunging in Canada and the US and, unless
profitability in the rest of the world advances sharply, they may be unable to
pay their financial obligations as they are 'burning' through available cash and
credit at a frightening rate.
But the rest of the world is in growing trouble as well. The Financial Times
(FT) just reported that recent data confirms, "...a slowdown in the Eurozone
manufacturing sector and a weakening business climate...Eurozone purchasing
managers reported that activity slowed to its lowest level since May, 2005."
Another headline read, "Gloom deepens over growth and inflation", and details
how new data confirmed a contraction in both the manufacturing and service
sectors in Europe this month.
Europe and America are hardly alone in these spreading economic woes. Inflation
in Vietnam has caused the government there to halt the importation of gold
(shades of Roosevelt 1933!) as the Vietnamese government in Hanoi believes that
the people's desire to exchange their home currencies for the safety of gold is
causing a depreciation of the Vietnamese Dong.
In Egypt, price inflation is rising at the fastest level in 20 years and
President Hosni Mubarak just ordered a thirty percent rise in the wages of
government employees to compensate for growing inflation and the Egyptian
government has also widened the scope of their food subsidy programs.
However, the most telling indication that the outlook for growth is changing
comes in the performance of the two stock indexes which relate to growth in
China and India, the Shanghai and Bombay Indexes. Both have plunged during the
past six months as investors clearly are indicating that the once glorious
picture of unending economic expansion in those two populous nations is
beginning to cloud over. The declines from their highs to this morning's prices
have been from just above 6,000 to 2,901 - a loss of over 50% - for Shanghai and
from near 21,000 to 14,401 for Bombay, a loss of over 30% It is worth noting
that share indexes in Hong Kong, Seoul and Taipei have also fallen sharply.
The Chinese expansion in particular may be at risk. Demand for their products in
Europe and America is slowing. Costs for their raw materials such as iron, coal,
fuel and agricultural products are rising sharply, forcing the price of their
products upward in the face of static to falling demand. Pollution concerns are
forcing new restrictions on manufacturing, power generation and transportation.
Shortages of fresh water appear to be developing. The list of problems is
suddenly huge and expanding.
Clearly, base metals have been sensing this change and it has been reflected in
the price quotes. We will watch the situation develop and report price
developments for this all-important segment of the junior mining industry on a
regular basis.
This morning brought about a sharp reversal in gold's fortunes. After a sharp
drop Monday and a modest recovery yesterday, gold has soared this morning on a
weaker U.S. Dollar and sharply higher petroleum complex prices. After one hour,
gold was up by about twenty-five dollars to near $910 per ounce while silver and
platinum have also posted sizeable gains. Crude is back above $137 per barrel,
the US Dollar Index has fallen to 72.67 and the Dow Industrials have been down
by as much as 160 points and, as the chart on the Dow shows, are now less than
200 points above their important lows set in January.
For a welcome change, base metals are stronger as a group this AM.
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