The metals mining industry has witnessed historical growth in commodity demand, and consequently in price, over the past few years. The growth has occurred across all sectors of the industry, from iron ore to specialty ores such as vanadium and molybdenum. The sudden and substantial rise in metals prices was the result of a dramatic increase in demand. This demand pressure occurred during a stagnant period for the mining industry. Investment in new exploration was very low; thus, mining houses were unprepared to meet the new level of demand.

The increase in demand has been driven in large part by a booming Asian economy, and in particular China. China’s demand for raw goods, especially metals, has seemed insatiable of late as their economy continues to grow between 9–10% annually. A notable part of this growth has been in infrastructure and other steel-intensive industries, such as automobiles.

An additional source of increased demand has come from the energy sector as world demand for petroleum, gas, and electricity accelerates, in part due to the strong Chinese economy. As demand for energy has grown, production from aging wells in the United States and other areas of the world has steadily been decreasing. Consequently, more wells have been drilled just to maintain past levels of production, thus compounding the demand for metal products and especially specialty steel, which is used heavily in the energy industry.

For 2007, high global steel production will pressure limited ore supply, giving bargaining strength to sellers. Ore supply will start to increase in 2007 as new mines come online. The best timing estimates indicate that mine output will begin to rise late in 2007.

Iron ore prices will once again rise in 2007, but the trend may be coming to an end. Ore supply has struggled to keep up with demand, but the market will become more balanced as the mine expansions start to send ore to end users. Brazil and Australia will continue to dominate the sea-borne ore trade. India has become more important but is likely to use a large share of output internally as its steel industry grows.

Much of the market disruption that occurred in 2004 was driven by global ore demand exceeding global ore mine capacity. Mines are expanding to meet demand and will alleviate the situation soon, but demand will not stop growing once the mines open. If ore companies stop expanding once the current round is done, then demand will once again surpass capacity early in the next decade, probably by 2011 or 2012.

The outlook for copper mining is governed by a lack of big mines coming into production. We do see higher output, with global mine production growing about 5.0% annually in 2007–08. This increase is in contrast to the mid-1990s, however, when a large deficit was transformed into a large surplus with the development of several world-class ore bodies. Several large mine projects have moved through the feasibility stage, but are not as yet actively moving into production. Even definitive "go" decisions at this point mean production will not come to market until 2009 at the earliest.

While we anticipate some weakness in nickel prices over the near term, the downward move is muted—prices hold above $26,000 per metric ton through the fourth quarter of 2007. The reason is inventory, which has remained at critically low levels through the summer, normally the slow time of year. We anticipate the market shifting into surplus over the near term, based on the development of several large new mines.

The price of chrome has been trending upwards since the start of 2001 as a result of several factors, most significantly that of the production of stainless steel. The stainless steel industry is by far the largest user of chromite ore. The recent rise in stainless prices, driven in part by increased Chinese demand, has pulled up chrome prices along with it. For the near term, we foresee stainless prices softening due to a deceleration of Chinese demand and a drop in nickel price; this along with a softening rand should put downward pressures on chrome prices, but the risk is on the upside.

Zinc is now exhibiting the same signs of the acute physical tightness that propelled copper prices in 2005 and early 2006, and that are now driving nickel prices. Specifically, visible inventory on the LME is plunging. Warehouse stocks totaled almost 400,000 metric tons in January 2006; as of mid-December, stocks had dwindled to just 87,000 metric tons, a 17-year low. Here the picture is not necessarily bad—we see no long-term resource scarcity—it will merely take time for a supply-side response to develop. This reflects the gutting of exploration budgets during the late 1990s that was a direct function of the low prices (and surplus markets) that then prevailed. Projected exploration expenditures across all metals are now at the peak levels observed during the early 1990s and late 1970s, which correlated (not surprisingly) with discoveries and, in turn, added mine production. This same sequence of heightened exploration, new mine capacity, and added refined production will play out during the next five years.

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