The metals market decryption and key factors

Decrypt minor metals markets requires a lot of curiosity because the exercise mobilizes various fields of knowledge. Monitor and understand changes in the price of lead metal effect to follow a whole industrial chain: beginning with mining projects and exploitation, refining processes, metallurgy, substitution, the work of R & D, and finally developments of recycling channels … Such diversity therefore requires a lot of demand in the analytical work, but it helps to make it even more exciting.

This section provides a panoramic view of the main factors to consider when studying the market of a minor and strategic metal, thereby to complete the analysis of supply and demand presented in the previous sections. Remember that each metal must be subject to a fine and complete analysis of its supply chain since, depending on the specific metal, the fragility of points can be made at very different levels. The analysis must take into account all the upstream and downstream chain, from mineral resource to finished product, and integrate the activities of investors and market intermediaries.

The reasoning proposed in this section is based on fundamental principles and generic (valid for any market), it complements and fine as important minor metals specifics detailed in previous sections. To synthesize these important characteristics to consider include the following main points:

  • The markets of minors and strategic metals d’échanges experiencing modest volumes compared to trade recorded in traditional markets for industrial metals. (- 200 tonnes per year against + 19 Million tonnes for copper, for example);
  • For most minor metals, there is not quotation or formal market place; only cobalt and molybdenum are an exception because they are sides on the London Metal Exchange in recent years ;
  • The balance between supply and demand is experiencing structural imbalances: the sometimes very violent increases in demand, the production system under different constraints, shows great inertia. The inelasticity of supply and demand is even greater for metals that are co-products or by-products of other mineral resources ;
  • Accordingly the previous point, crisis situations and supply disruptions are relatively common and severe on minor metals markets and generate strong pressure on prices and high volatility.

Some keys to decrypt the minor metals markets

  • Know the price formation mechanisms
  • Know the price formation mechanisms
  • The scarcity or criticality of the metal
  • The balance between supply and demand
  • Stocks and utilization rates
  • Ongoing or anticipated disruptions of supply
  • The benefits, performance and market expectations
  • The investment levels

Understanding the formation of stocks

As with any commodity, stocks may be formed to different links in the supply chain. Among producers, they can form mechanically when production exceeds demand, or the result of strategic choices, when prices are rising it is deemed preferable to postpone the sale. In some markets, where production is highly concentrated, stockpiling sometimes proves to be a maneuver to force up prices; a double-edged strategy, as evidenced by the example of Norilsk company presented in the previous section. (link to the relevant paragraph).

For that use the industrial metal, the trend is generally not the storage of large quantities. With the generalization of lean organizations, and often GAAP reserves management of raw materials, inventory accumulation is often badly perceived, especially in times when liquidity is precious.

Between supply and demand, inventories are also made in the context of activities d’intermédiaires market (essential to ensure better distribution and market liquidity) or of investors. For some particularly critical and crucial metals, strategic storage policy we finally mention deployed by some nations to secure their supply.

foresee-the-crisisProvide long-term trends and decrypt economic crises

To compile a summary of the main factors expected to forge over the long term metals, reference may be made to list the proposed institute in a 2013 McKinsey report

  • The growing difficulty of access to mineral resources
  • The funding gap for new projects
  • The skills challenge
  • Growth in emerging markets
  • New forms of application
  • The incorporation of environmental externalities
  • Breaking technology and recycling

 

Source:
“Tracking global commodity markets” – McKinsey Global Institute – Septembre 2013

Regarding crisis situations, they are much more frequent and violent as the major metals markets. Sometimes they generate huge price increases and extreme volatility.

 

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Schematically, we can distinguish two main types of seizures:

The crises of supply, related to temporary and short-term interruptions of production, of an accidental nature (technical incidents, weather hazards … etc.) Or intentional (deliberate drying of the offer, strategic or speculative storage, quotas and export restrictions …).

The crises demand, caused by the massive distribution of disruptive technology embarking minor metals.

The impact of such events on the price of a metal depends on several important factors detailed in previous sections, including the degree of concentration of production, the amount of metal used for each application, the possibility of substitute products …

The most dramatic increases are usually found during crises demand, when the metal is irreplaceable and used in small quantities. Indeed, despite the low quantities involved by product, the massive distribution generates the overall significant and rapid increase in demand, the production system is unable to meet. For industrial, low amounts of metal embedded product make up, even massive course, has little influence on the overall cost of the product. For buyers, no matter therefore the price, the real risk proving to be the shortage. These situations sometimes lead to real phenomena of runaways, buyers while conducting compulsive shopping fueling the exponential rise in prices.