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Metal markets seen divergent in 2012

Keywords: Tags  2012 outlook, Market Spotlight, Bill Beck

As the new year got under way, copper, iron ore and aluminum—mainstays of the minerals and metals segment of the North American economy—all seemed to be going their separate ways.

Copper was buoyed by reports that China had ended 2011 with record monthly imports of the red metal. The story was somewhat similar for iron ore, which opened 2012 strong on news that China, the world’s biggest iron ore purchaser, had imported 686 million tonnes in 2011, up 11 percent from 618 million tonnes the previous year. Iron ore has enjoyed an unprecedented price rise during the past eight years, climbing to as high as $220 per tonne in 2011, more than six times the $33 per tonne that iron ore fetched on world markets as recently as 2003.

Aluminum producers, meanwhile, have been evaluating significant capacity cuts in an attempt to stem the steady slide in prices after reaching record levels in May 2011. In January, Pittsburgh-based Alcoa Inc., one of the larger world producers, announced a fourth-quarter net loss—its first quarterly loss since 2009—as aluminum prices dropped 11 percent in the quarter. Alcoa subsequently announced plans to decommission nearly 300,000 tonnes of annual smelting capacity in Tennessee and Texas and idle an additional 224,000 tonnes of smelter capacity in Europe.

Another major producer, Montreal-based Rio Tinto Alcan, announced plans in late 2011 to balance inventory and demand by shutting down or divesting significant amounts of smelting capacity in North America, Europe, Australia and New Zealand. 

And because of the need to divert electric power to residential users, Chinese provincial governments are moving to eliminate subsidies to aluminum producers. Alcoa recently estimated that as much as 1 million tonnes of Chinese aluminum smelting capacity could be curtailed in 2012.

But Fitch Ratings Ltd., which provides credit ratings for the base metals industry, estimated that even with the curtailments, “approximately 3.4 million tonnes of new production will be added this year, with almost 90 percent of the total coming from China. New projects may add 2.8 million tonnes more to global production in 2013.”

Still, Wall Street was bullish on aluminum after Alcoa bit the bullet and announced plans to decommission and curtail smelter production in North America and abroad. Since most analysts believe that non-productive capacity is behind the plummeting prices in aluminum since last spring, action by the world’s second-largest producer to shut down capacity that can’t be made profitable at depressed price levels was viewed as a positive.

The news that Chinese copper imports had climbed to record levels in the final two months of last year took the wind out of the sails of money managers, who had been betting for most of the final quarter of 2011 that copper prices would fall. Royal Bank of Scotland Plc, for example, believes copper prices will fall about 15 percent in 2012 to $8,375 per tonne on fears that the European debt crisis will spark a recession on the continent. The bank also expects demand for copper in China to wane as that country’s economy contracts in 2012, although its December import numbers belied that prediction.

Freeport-McMoRan Copper & Gold Inc., Phoenix, the world’s largest publicly traded copper company, recently reached terms with union officials in Indonesia, where it has endured a lengthy labor stoppage and civil unrest. The strike in Indonesia contributed to a drop in Freeport’s fourth-quarter copper production, which had been expected to total as much as 915 million pounds but which now looks to reach barely 800 million pounds.

Freeport is one of the major producers in Arizona, where some 60 percent of all U.S. copper is produced. The company owns six of the nine major mines in the state, including the Safford Mine, the first new large-scale copper mining project in Arizona in 30 years when it went into full production in 2008. The Arizona Mining Association said recently that the copper mining industry has a $12.1-billion economic impact in the state, including $3.6 billion in wages and personal income, $7.9 billion in business sales and $600 million in state and local government taxes and revenue. The industry employed 10,400 people in the state in 2010, the latest year for which figures are available.

Iron ore in North America has enjoyed a strong recovery since production plummeted during the Great Recession of 2008-09. With a capacity of about 52 million tons in Minnesota and Michigan’s Upper Peninsula, the U.S. industry has benefited from strong order books at domestic steelmakers. Minnesota and Michigan pellet plants ran at near-full capacity in 2011, fueled by North American automotive production that reached nearly 13 million vehicles for the year, up about 1 million from the previous year. 

“There has even been talk of iron ore going from the Great Lakes to world markets,” said Peter Kakela, a professor of natural resources development at Michigan State University in East Lansing and one of the nation’s pre-eminent authorities on iron ore pricing and production. He thinks the industry will expand in North America in the years ahead due to strong global demand.

That has already begun to occur. In 2011, Iron Ore Co. of Canada Ltd., the largest manufacturer of iron ore pellets in Canada, announced plans to increase production of concentrates at its Labrador facility to more than 23 million tonnes per year, up from 18 million tonnes five years earlier, and said it was studying a further expansion to 26 million tonnes.

AK Steel Corp., West Chester, Ohio, announced during the fourth quarter that it would partner with Nashwauk, Minn.-based ore processor Magnetation Inc. to build a new taconite pellet plant on the state’s iron rich Mesabi Range. “It’s another example of integrated steelmakers trying to get their own resources under control,” Kakela said. “ArcelorMittal (SA) wants to be 75 percent self-sufficient in iron ore. They are buying iron ore properties worldwide.”

Gogebic Taconite LLC, a development-stage iron ore mining company in Wisconsin, is seeking federal and state permits to mine, concentrate and pelletize taconite on the state’s long-abandoned Gogebic Iron Range. The company estimates that taconite production in the state’s rural northern counties could have an economic benefit of $600 million per year.

Alternative iron products also are undergoing a boom in North America. Production at Fort Wayne, Ind.-based Steel Dynamics Inc.’s Mesabi Nugget project in Minnesota doubled in 2011 and is expected to double again in 2012. The almost-pure iron nuggets will be used to supplement pig iron and prime scrap. 

In Louisiana, Nucor Corp., Charlotte, N,C., broke ground in March on a new direct-reduced iron manufacturing plant in St. James Parish that will have an annual capacity of 2.5 million tons of DRI per year when it comes online.

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