The start of 2014 is already promising some excitement for the metals industry. Two international events will be watched closely by investors.
One is the Indonesian government’s decision to insist on value-addition to locally mined ore before it can be exported. The new rules are set to come into effect from 12 January. According to a Bloomberg News report, the country accounts for 18-20% of global nickel supplies, about 10% of aluminium supply from bauxite and 3% of copper suppliers.
This law’s implementation is expected to severely curtail ore exports as there isn’t enough processing capacity in that country. The industry plans to ask the country’s Supreme Court for clarifications, according to a Reuters news report. If implemented in full, this could cause tighter supply conditions for nickel, aluminium and copper in the near term.UC Rusal Plc has filed a suit in UK saying that the proposed changes “are irrational and disproportionate, and that Rusal’s human rights have thereby been breached”, according to a regulatory filing by LME’s parent company, Hong Kong Exchanges and Clearing Ltd.
These two events will have some bearing on parts of the industry in 2014. They follow a year when the industry under-performed. Most metals saw prices decline in 2013: copper prices fell by 10.2%, aluminium by 15.5% and zinc by 2.6%. The ferrous side too suffered, with Chinese benchmark iron ore prices falling by 7.5% while flat steel prices fell by 13.6%.
The metals industry suffered mainly due to weak demand, with the normally strong emerging markets failing to prop up demand. Companies have responded by temporarily shutting down loss-making capacity to correct the demand-supply imbalance.
A weak rupee was perhaps the only major consolation for Indian metal producers in 2013 as it protected them from falling prices. But that comfort may not last as the rupee has strengthened. Domestic capacity has increased and is expected to increase in the next few years. Producers need a few things to come together to be able to report good results.
They need global growth to recover, international prices to perk up, a healthier domestic economy with a pick-up in investment demand, and domestic interest rates to decline so that their financing costs decline. That’s a long wish list but even if some of them are fulfilled in 2014, it should bring some smiles back.