Natural Resources: Market Change to Sellers’ Conditions
by Eike v.d.Linden, Germany
Market conditions of natural resources are undergoing a significant change. This is the obvious result of market observations, amongst others, of those reported on the annual convention of the German steel industry in Düsseldorf on 13.-14.11.2003 (Natural resources presentations organized by VDEH and GDMB). Natural resources as used in this paper include all primary fuels, metal ores and industrial minerals extracted by mining.
Natural resources consumed for steel making, like coking coal, iron ore, and metal alloy ores with buyers’ market conditions over decades have changed to sellers’ conditions. This is due to the booming consumption of the Chinese and to a lesser but still significant consumption of the Indian steel industry. The Chinese steel production and the corresponding consumption of the relevant natural resources have reached 30% of the global numbers in 2003 (1).
The development on the steel side is symptomatic for natural resources markets in general. This is being presented in this paper for copper. In addition and in view of the changing market conditions the supply of the German industry with natural resources is discussed and the natural resources input for the German GDP.
Global Perspectives
The perspectives of the global supply of natural resources can be compiled as follows:
• In the second half of the 20th century approximately 20% of the World population in Europe, North-America, Japan und Russia have consumed approximately 80% of the natural resources extracted globally. With an increasing participation of Asian countries already in the last decade, now in the first decade of the 21st century approximately 50% of the World population including China and India share in the bulk of natural resources consumption.
• On the "S-curve" of the per capita consumption the new consumer countries can be found on the steep incline. Until saturation a longer period of consumption increase can be projected.
• The supply side of the market has seen significant concentrations during the last 10-15 years, this applies for supply by countries as well as by companies (2). For some of the natural resources the supply side seems to reach oligopolistic structures.
• The supply side has reduced exploration and capital expenditures during recent years due to the economic situation but also to achieve balanced market conditions and better commodity prices. The market participants on the demands and supply sides seem to have underestimated the prevailing Asian and, in particular, Chinese development.
• As a consequence of the booming demand, up to now even without major growth in North-America and Europe, a competition on natural resources is developing and has created sellers’ market conditions. It can be expected that these conditions will last over the coming years of this decade.
• The "terms of trade", which during the second half of the 20th century have extremely worsened on the account of natural resources are expected to turn back. As an example: in the 1950ies 1 tonne of copper was equal to the value of 1 standard Volkswagen (VW); in the year 2000, 10 tonnes of copper traded against the value of 1 VW Polo; in February 2004 the copper to be traded against 1 VW Polo is reduced to 6 tonnes already.
Example Copper
Until recently the copper producers suffered under an oversupply resulting in increasing stockpiles and low prices. The market expectation for the current decade is presented in Table 1.
Table 1: Expected global Copper Market: Forecast in Million t
(Sources: DB Research, BGR, own file)
Year 2003 2004 20 05 2010
Global Consumption 15.7 16.4 17.0 20.8
Deduct:
- Production from existing
Capacities incl. Recycling 15.35 16.0 16.1 15.3
- Production from possible
new Capacities
incl. Recycling 0 0.1 0.5 5.0
Deficit /
Release from stockpile - 0.35 - 0.3 - 0.4 - 0.5
Commercial stocks
(beginning of the year) 1.8 1.5 1.1 ?
Conclusions derived from the expected development of the copper market:
• To match the demand of the year 2010 the supply share from new primary- and secondary- capacities will have to be approx. 5 million t (thereof approx. 4 million t from primary-capacities), i.e. new capacities will count for 25% of the expected consumption.
• New capacities of 4 million annual tonnes of primary copper require the successful exploration of 100 million t copper content (lifetime of mines 25 years) respectively 10 billion t of copper ore (at 1.1% Cu , 90% recovery).
• The successful exploration of 10 billion t of copper ore will cause exploration expenditures of US$ 2-3 billion.
• The construction of new mine capacities for 4 million annual t of copper will require capital expenditures of approx. US$ 20 billion (US$ 5000 per tonne annual capacity).
It is yet speculative to what extent new mine capacities with 4 million annual tonnes of copper will be committed and financed within the remaining period of time until 2010. Until year 2007 the development of new annual capacities of 1.5-2.0 million has become know (2). It cannot be excluded that toll smelters not integrated upstream will face risks concerning physical supply and/or will have to accept low treatment and refining charges (TC/RC).
In view of the required new mine capacities for copper it is notable that copper counts for less than 5% of overall generated mine values and correspondingly for investment requirements.
Natural Resources in View of German Supply
In the mind of the German public mining is associated with environmental damage, subsidies, a necessary evil or topped “unnecessary”, similar to the persiflage used for electricity supply: "For what do we need power plants? At our place power comes out of the plug."
The supply of natural resources in view of the German industry is expected to continue with ongoing buyers’ market conditions and with favourable trading options. Similar to power, there is another frequently citied persiflage: "For the supply of a glass of milk it is unnecessary to buy a cow."
The German supply of natural resources is partly based on still notable domestic mining, partly on imports. The value of domestic mining and the value of imported natural resources is presented in Table 2.
Table 2: Sources and Value of the German Consumption of Natural Resources (Year 2002)
The input of natural resources consisting of domestic mine production and imports with a total value of € 85.4 billion is related to the German GDP and various natural resources intensive sectors in Table 3.
Table 3: GDP related to Natural Resources Input (Year 2002)
(Sources: Stat. Bundesamt, BGR, own files)
Gross Domestic Production € 2110 bn Nat-resources input 4.0%
(2002)
thereof
Value producing industries € 603 bn Nat-resources-input 7-10%
Value civil construction € 95 bn Nat-resources input >10%
Value trade, restaurants, € 395 bn Nat-resources input 6%
traffic
Remark: The input related to the GDP is calculated based on statistical data. The input related to the quoted sectors is estimated based on the assumption that the tertiary sector of services requires a lower than average input. For comparison reasons reference is made to (3), (4). It needs to be reminded that the input includes primary fuels, metal ores and industrial minerals only and not the downstream value generated by energy conversion or smelting, etc..
German Equity Participations in International Mining
The heavy dependence of the German economy on imports of natural resources with the exception of lignite, potash, rock salt and industrial minerals and the developing sellers’ conditions on the markets are unfortunately combined with the retreat of German companies from equity participations in international mining as presented in Table 4.
Table 4: German Equity Participations in International Mining
Table 4 is evidencing the trend of reduced equity participations of German companies in international mining. Previous participations in strategic base metals have been completely abandoned.
Conclusion and Recommendation: Upstream Engagements
• The input of natural resources of 4% related to the value of the German GDP looks small compared, for example, with German health care which counts for 10% or with research & development which counts after all for 2.5%. (US-input for R&D is 3%).
• Although the number of 4% is small, the input of natural resources is absolutely essential for the economy and the generation of the GDP. A gap in the supply would significantly impact the economy and employment. "Without natural resources no production, no modern civilisation!"
• Germany consumes 3-7% of the global consumption of the various natural resources.
• For comparison reason: The German population counts for 1.2% of the World population.
• Different to the actual absenteeism in international mining, a stronger involvement of German companies should be regarded as possible in view of their economical strength.
• Non-upstream integrated companies in the field of smelting, steel making, electricity generating, etc. are facing risks of higher input prices or physical undersupply.
• The changing terms of trade in favour of natural resources will result in corresponding increases in the entrepreneurial and domestic P&L calculations.
• The sellers’ market conditions and improved terms of trade will have the positive effect of improved rates of return on engagements upstream in mining.
• Captive sources of supply in addition to equity participations can also be arranged by long term off-take contracts combined with debt funding arrangements (ex: UFK, Barter Trade).
• Recommendation: Upstream integration.
• Further recommendation for the mining branch: Information, image improvement.
Sources of Information
(1) DB Research
(2) Wellmer, F.-W.: Die Rohstoffsituation der Welt. Erzmetall 56 (2003), Nr.12.
(3) Sames, C.-W.: Bergbauprodukte in der Wertschöpfungskette. Glückauf 139 (2003), Nr. 11.
(4) Wirtschaftsvereinigung Bergbau: Die Zukunft beginnt mit dem Bergbau. Eigenveröffentlichung (2000).
(5) BGR Data
(6) von der Linden, E.: Trends in der Preisentwicklung von Rohstoffen – betrachtet am Beispiel Kupfer. Erzmetall 49 (1996) Nr. 11.
Natural Resources: Market Change to Sellers’ Conditions
Natural Resources: Market Change to Sellers’ Conditions
by Eike v.d.Linden, Germany
Market conditions of natural resources are undergoing a significant change. This is the obvious result of market observations, amongst others, of those reported on the annual convention of the German steel industry in Düsseldorf on 13.-14.11.2003 (Natural resources presentations organized by VDEH and GDMB). Natural resources as used in this paper include all primary fuels, metal ores and industrial minerals extracted by mining.
Natural resources consumed for steel making, like coking coal, iron ore, and metal alloy ores with buyers’ market conditions over decades have changed to sellers’ conditions. This is due to the booming consumption of the Chinese and to a lesser but still significant consumption of the Indian steel industry. The Chinese steel production and the corresponding consumption of the relevant natural resources have reached 30% of the global numbers in 2003 (1).
The development on the steel side is symptomatic for natural resources markets in general. This is being presented in this paper for copper. In addition and in view of the changing market conditions the supply of the German industry with natural resources is discussed and the natural resources input for the German GDP.
Global Perspectives
The perspectives of the global supply of natural resources can be compiled as follows:
• In the second half of the 20th century approximately 20% of the World population in Europe, North-America, Japan und Russia have consumed approximately 80% of the natural resources extracted globally. With an increasing participation of Asian countries already in the last decade, now in the first decade of the 21st century approximately 50% of the World population including China and India share in the bulk of natural resources consumption.
• On the "S-curve" of the per capita consumption the new consumer countries can be found on the steep incline. Until saturation a longer period of consumption increase can be projected.
• The supply side of the market has seen significant concentrations during the last 10-15 years, this applies for supply by countries as well as by companies (2). For some of the natural resources the supply side seems to reach oligopolistic structures.
• The supply side has reduced exploration and capital expenditures during recent years due to the economic situation but also to achieve balanced market conditions and better commodity prices. The market participants on the demands and supply sides seem to have underestimated the prevailing Asian and, in particular, Chinese development.
• As a consequence of the booming demand, up to now even without major growth in North-America and Europe, a competition on natural resources is developing and has created sellers’ market conditions. It can be expected that these conditions will last over the coming years of this decade.
• The "terms of trade", which during the second half of the 20th century have extremely worsened on the account of natural resources are expected to turn back. As an example: in the 1950ies 1 tonne of copper was equal to the value of 1 standard Volkswagen (VW); in the year 2000, 10 tonnes of copper traded against the value of 1 VW Polo; in February 2004 the copper to be traded against 1 VW Polo is reduced to 6 tonnes already.
Example Copper
Until recently the copper producers suffered under an oversupply resulting in increasing stockpiles and low prices. The market expectation for the current decade is presented in Table 1.
Table 1: Expected global Copper Market: Forecast in Million t
(Sources: DB Research, BGR, own file)
Year 2003 2004 20 05 2010
Global Consumption 15.7 16.4 17.0 20.8
Deduct:
- Production from existing
Capacities incl. Recycling 15.35 16.0 16.1 15.3
- Production from possible
new Capacities
incl. Recycling 0 0.1 0.5 5.0
Deficit /
Release from stockpile - 0.35 - 0.3 - 0.4 - 0.5
Commercial stocks
(beginning of the year) 1.8 1.5 1.1 ?
Conclusions derived from the expected development of the copper market:
• To match the demand of the year 2010 the supply share from new primary- and secondary- capacities will have to be approx. 5 million t (thereof approx. 4 million t from primary-capacities), i.e. new capacities will count for 25% of the expected consumption.
• New capacities of 4 million annual tonnes of primary copper require the successful exploration of 100 million t copper content (lifetime of mines 25 years) respectively 10 billion t of copper ore (at 1.1% Cu , 90% recovery).
• The successful exploration of 10 billion t of copper ore will cause exploration expenditures of US$ 2-3 billion.
• The construction of new mine capacities for 4 million annual t of copper will require capital expenditures of approx. US$ 20 billion (US$ 5000 per tonne annual capacity).
It is yet speculative to what extent new mine capacities with 4 million annual tonnes of copper will be committed and financed within the remaining period of time until 2010. Until year 2007 the development of new annual capacities of 1.5-2.0 million has become know (2). It cannot be excluded that toll smelters not integrated upstream will face risks concerning physical supply and/or will have to accept low treatment and refining charges (TC/RC).
In view of the required new mine capacities for copper it is notable that copper counts for less than 5% of overall generated mine values and correspondingly for investment requirements.
Natural Resources in View of German Supply
In the mind of the German public mining is associated with environmental damage, subsidies, a necessary evil or topped “unnecessary”, similar to the persiflage used for electricity supply: "For what do we need power plants? At our place power comes out of the plug."
The supply of natural resources in view of the German industry is expected to continue with ongoing buyers’ market conditions and with favourable trading options. Similar to power, there is another frequently citied persiflage: "For the supply of a glass of milk it is unnecessary to buy a cow."
The German supply of natural resources is partly based on still notable domestic mining, partly on imports. The value of domestic mining and the value of imported natural resources is presented in Table 2.
Table 2: Sources and Value of the German Consumption of Natural Resources (Year 2002)
(Sources: Stat. Bundesamt, BGR, own file)
• Industrial Minerals 95% domestic (balance) 22.0 billion €
• Oil 3% domestic 0.7 billion €
• Natural Gas 20% domestic 2.3 billion €
• Bituminous Coal 48% domestic 2 .2 billion € (€42/t)
• Lignite 100% domestic 1.6 billion € (€ 9/t)
• Potash 100% domestic 1.0 billion €
• Rock Salt 100% domestic 0.9 billion €
Total domestic Mining 30.7 bn €
• Oil 97% import 22.5 billion €
• Natural Gas 80% import 12.4 billion €
• Bituminous Coal 52% import 1.9 billion €
• Copper 100% import 2.0 billion €
• Bauxite,Aluminum 100% import 3.7 billion €
• Zinc, Lead, tin conc. 100% import 0.5 billion €
• Iron Ore 100% import 2.1 billion €
• Steel alloys 100% import 2.0 billion €
• Refractory metals 100% import 1.0 billion €
• Precious Metals 100% import 3.1 billion €
• Misc. Net. Res. import balance 3.5 billion €
(in particular, Petrochemicals)
.
Total Imports 54.7 bn €
Total Input Natural Resources 85.4 bn €
Natural Resources Input related to German GDP
The input of natural resources consisting of domestic mine production and imports with a total value of € 85.4 billion is related to the German GDP and various natural resources intensive sectors in Table 3.
Table 3: GDP related to Natural Resources Input (Year 2002)
(Sources: Stat. Bundesamt, BGR, own files)
Gross Domestic Production € 2110 bn Nat-resources input 4.0%
(2002)
thereof
Value producing industries € 603 bn Nat-resources-input 7-10%
Value civil construction € 95 bn Nat-resources input >10%
Value trade, restaurants, € 395 bn Nat-resources input 6%
traffic
Remark: The input related to the GDP is calculated based on statistical data. The input related to the quoted sectors is estimated based on the assumption that the tertiary sector of services requires a lower than average input. For comparison reasons reference is made to (3), (4). It needs to be reminded that the input includes primary fuels, metal ores and industrial minerals only and not the downstream value generated by energy conversion or smelting, etc..
German Equity Participations in International Mining
The heavy dependence of the German economy on imports of natural resources with the exception of lignite, potash, rock salt and industrial minerals and the developing sellers’ conditions on the markets are unfortunately combined with the retreat of German companies from equity participations in international mining as presented in Table 4.
Table 4: German Equity Participations in International Mining
(Sources: BGR, WVB, own files)
Oil approx. 15% of imports
Natural Gas approx. 15% of imports
Bituminous Coal actual >100%, planned nil
Base Metals Nilexit 1990
Bauxite, Aluminum Nilexit End 90-ies
Iron Ore Nilexit 2002
Steel alloys small(Mn+Cr)
Refractory metals Nilexit around 1990
Special metals small(Li+Mg)
Potash Nilexit in 90-ies
Precious metals Nilexit around 1990
Industrial Minerals some(Gypsum, Talc, Bentonite, etc.)
Table 4 is evidencing the trend of reduced equity participations of German companies in international mining. Previous participations in strategic base metals have been completely abandoned.
Conclusion and Recommendation: Upstream Engagements
• The input of natural resources of 4% related to the value of the German GDP looks small compared, for example, with German health care which counts for 10% or with research & development which counts after all for 2.5%. (US-input for R&D is 3%).
• Although the number of 4% is small, the input of natural resources is absolutely essential for the economy and the generation of the GDP. A gap in the supply would significantly impact the economy and employment. "Without natural resources no production, no modern civilisation!"
• Germany consumes 3-7% of the global consumption of the various natural resources.
• For comparison reason: The German population counts for 1.2% of the World population.
• Different to the actual absenteeism in international mining, a stronger involvement of German companies should be regarded as possible in view of their economical strength.
• Non-upstream integrated companies in the field of smelting, steel making, electricity generating, etc. are facing risks of higher input prices or physical undersupply.
• The changing terms of trade in favour of natural resources will result in corresponding increases in the entrepreneurial and domestic P&L calculations.
• The sellers’ market conditions and improved terms of trade will have the positive effect of improved rates of return on engagements upstream in mining.
• Captive sources of supply in addition to equity participations can also be arranged by long term off-take contracts combined with debt funding arrangements (ex: UFK, Barter Trade).
• Recommendation: Upstream integration.
• Further recommendation for the mining branch: Information, image improvement.
Sources of Information
(1) DB Research
(2) Wellmer, F.-W.: Die Rohstoffsituation der Welt. Erzmetall 56 (2003), Nr.12.
(3) Sames, C.-W.: Bergbauprodukte in der Wertschöpfungskette. Glückauf 139 (2003), Nr. 11.
(4) Wirtschaftsvereinigung Bergbau: Die Zukunft beginnt mit dem Bergbau. Eigenveröffentlichung (2000).
(5) BGR Data
(6) von der Linden, E.: Trends in der Preisentwicklung von Rohstoffen – betrachtet am Beispiel Kupfer. Erzmetall 49 (1996) Nr. 11.
This article will be published in print form by:
World of Mining
56/2004 No. 3
GDMB Medienverlag , ISSN 1613-2408 ■