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Slump in demand for new vehicles pushing base metal prices lower
By Kristine Owram, THE CANADIAN PRESS
Wednesday, January 21, 2009

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TORONTO - As automakers around the world cut production in response to a sharp drop in demand for new vehicles, miners are being pinched too.

The auto industry accounts for 11 per cent of global copper consumption, 16 per cent of global nickel consumption, 22 per cent of global aluminum consumption and 23 per cent of global zinc consumption, according to a Desjardins Securities report.

But demand for these and other base metals is drying up as automakers and their parts suppliers scale back production.

John Turner, leader of the Global Mining Group at corporate law firm Fasken Martineau, said slower auto production is a "key" factor pushing down in base metal prices - many have fallen 60 per cent or more in recent months - and the resulting closure of many mines.

"We’re certainly seeing a lot of mines that were in development being stopped and mines that were in production are being put on care and maintenance," Turner said.

"Part of that was just a sideswipe from the liquidity credit crisis, but part of it was a massive downturn in production in the auto and other industries."

Many miners, as well as investors in metals and mining stocks, had believed they could continue to rely on demand for new vehicles in the exploding markets of China and India, but even that is no longer true, said Andrew Martyn, a vice-president at Toronto-based investment adviser Davis-Rea Ltd.

"The Americans are important, but I believe they were dwarfed by the expectations of China and southeast Asia," Martyn said.

"I’m hearing about Chinese factories actually being mothballed... the slackening in U.S. autos is clearly responsible for a portion (of the commodity price decline), but I think the bigger picture would be the worldwide slackening in cars."

And even though demand for new vehicles in developing countries is still growing, it’s happening at a much slower pace than expected and is being offset by rapidly shrinking demand in North America and Europe, Turner said.

"For a while, people thought, well, okay, U.S. and Canada car production has gone way down but we’ll be okay because China and India and others are still going to be expanding," Turner said.

"It took a while, but it eventually became clear that even though there’s still growth going on in some of these places, the North American decline and the European decline is having a massive impact on metal prices."

Part of the reason for this is the sheer number of vehicles per person, particularly in the U.S., compared to developing countries like China where cars are still a relative luxury.

As the economy slows down, so too does the vehicle replacement cycle, meaning Americans who would normally buy a new car every few years are holding onto their vehicles for longer, said Martyn.

This is bad news for most miners, whose metals are used in components in new vehicles, but lead miners are actually benefiting from the slump in new vehicle sales, according to Bob Tebbutt, vice-president at Peregrine Financial.

"In the lead market, only 10 per cent is used in auto batteries going into new cars while 40 per cent goes into replacement batteries," Tebbutt wrote in a note to clients.

"With consumers keeping their cars longer, we can expect that the replacement battery business will be more active and therefore more lead will be used."

He added that lead prices have performed the best of the base metals so far in 2009, increasing 13 per cent since Jan. 1.

North America has been hit the hardest by the slump in auto sales, and there are few assembly plants in Canada and the U.S. that have been spared from production slowdowns and temporary layoffs. But the global financial and economic crisis means the slowdown in the auto industry has now spread to every continent.

The prices of base metals used in vehicle production have slumped in tandem with shrinking demand.

Copper prices on the New York Mercantile Exchange are approximately US$1.50 per pound after reaching above $4 per pound in the summer, while zinc prices are approximately 50 cents US per pound after reaching above $1.20 per pound last February.

Prices for other metals used in vehicle production, including aluminum, nickel and platinum, are also down substantially.

Several Canadian companies - from Vale Inco, Xstrata Canada, Rio Tinto Alcan and others - have scaled back expansions, cut jobs and shut down unprofitable mines to conserve cash and get through one of the industry’s most difficult periods in decades.

But Michael Jones, president and chief executive of Platinum Group Metals Ltd. (TSX:PTM), said he’s optimistic that demand for new vehicles from the so-called BRIC countries - Brazil, Russia, India and China - will offset slumping sales in the developed world in 2009.

"Research shows that... at about $5,000 annual income, people get interested in buying a car," Jones told the Business News Network, a specialty cable TV channel.

"My personal belief is that we’re going to see continued strong growth as more and more people cross that threshold, and you’re going to see demand for platinum continue to be more robust in 2009."

Platinum is used in catalytic converters, which reduce emissions from vehicle engines.

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