Report No. 814/94 Market Outlook for Major Primary Commodities Energy, Metals and Minerals February 1994 International Trade Division International Economics Development FOR OFFICIAL USE ONLY - - ---~ Document of the World Bank This document has a restricted distribution and may beused by recipients only in the ance of theiriofficialduties.$tstcontents may not othenwise be disciosed wthoutWorld B h FOR OFFICIAL USE ONLY Market Outlook For Major Primary Commodities Summary, Energy, Metals and Minerals This documcnt has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizafion. Contents Preface ............ v Notes and Definitions................... ...................... ...........vi Commodity Description ...........ix Summary ...........x Energy Petroleum ............1 Summary ................1 Demand Outlook.................................................4 Supply Outlook..................................................9 Petroleum Price Outlook .................... ................ 18 Annex I: Fiscal and Financial Incentives: Key to Oil Development ..............23 Annex I: World Refining Outlook ............................. .......25 Coal...........................................................33 Summary.....................................................33 Demand Outlook.................................................34 Supply Outlook.................................................39 Trade Outlook..........................................................43 Price Outlook.........................................................43 Technology and Environment.........................................45 Metals and Minerals Copper .........................................................51 Summary.....................................................51 Demand Outlook................................................52 Supply Outlook ........................................ .........56 Price Outlook..................................................63 Tin........... ................................................ 78 Summary.....................................................78 Demand Outlook................................................80 Supply Outlook ............................................ .....83 Price Outlook............................................ .....89 Nickel ..........................................................92 Summary.....................................................92 Demand Outlook................................................93 Supply Outlook ........................................... ......95 Price Prospects.................. .................... ...........101 iii Aluminum and Bauxite.......... .................................................................105 Summary .................................................... 105 Demand Outlook ............ ............................................ 106 Supply Outlook .....1...........11.......1 Production Costs ............................................ 117 Trade Outlook ............................................................ I18 Price Outlook ........................ 119 Iron Ore................................ .............................135 Sum m ary ............................................................................................. 135 Demand Outlook........................ ............................ 136 Supply Outlook ........................................... ..... 138 Trade Outlook....................... ..... ...................... 143 Price Prospects................................................................1 46 Steel...... ....................................................154 Summary ............................................................................ 154 Demand Outlook............................................... 155 Supply Outlook .......................................... ...... 158 Trade Prospects ........................................... .....164 Price Outlook.................................................... .....1 66 Lead and Zinc............................................ ........171 Summary.....................................................171 Demand Outlook.................. ...................... ......172 Supply Outlook .......................................... ......174 Price Outlook................ . ....................... .......176 Cold ..................................................... 180 Summary....................................................180 Demand Outlook.......................................... ......181 Supply Outlook ........................................... .....183 Price Outlook.................. ......................... .....185 Silver ...... ................................................... 190 Summary.................................................................190 Dem and Outlook................................................................................. 191 Supply Outlook........................................................ ..... 192 Price Outlook......................................................................................... 193 Annex 1: Privatization and Liberalization of the Mining Sector in Developing Countries: Implications for Market Outlook.........................................................................197 Annex II: Recent Developments and Prospects for China's Metals Market.........................218 iv Preface This report is a compilation of studies that review the market prospects for energy and for metals and minerals commodities. The forecasts are mainly used in projecting the balance of payments of countries that borrow from the World Bank and in appraising investment projects that include these commodities as inputs or outputs. Because of the multiple purposes they are intended to serve, the price forecasts are presented in current (nominal) as well as 1990 constant dollar (real) terms.' For the period 1994-96, the price forecasts are the prices expected for the individual years. For 2000 and 2005, the price forecasts are intended to indicate the underlying trends. The forecasts are conditional on the various macroeconomic and commodity-specific assumptions used--all of which are subject to great uncertainty. The macroeconomic scenario underpinning the forecasts is discussed in the World Bank's report, Global Economic Prospects and the Developing Countries, 1994. Because of the uncertainty which is inherent in commodity price forecasts, the International Trade Division periodically prepares probability distributions of its price forecasts. These are presented in the summary. For most commodities or groups of commodities, this report presents standardized sets of tables giving historical and forecast values for production, consumption, exports, and imports. These tables give details of major economic regions as well as of countries that are major participants in these markets. The fore...ts are professional judgments informed by simulations using global commodity models maintained within the International Trade Division of the World Bank's International Economics Department. Details of these models may be obtained directly from the Division. In preparing this report the Division has consulted widely with experts on commodities in both public and private organizations, who have been most forthcoming in providing data and in discussing the outlook for the various commodity markets. Their cooperation has added to the accuracy of this report and is gratefully acknowledged. All remaining errors are the responsibility of the authors. I Commodity prices have been deflated by the World Banks Manufacturing Unit Value (MUV) index and the G-7 CPI. The MUV index is the index of US dollar prices of industrial countries' manufactured exports (SITC 5-8) to the developing countries and may be regarded as a useful deflator to measure changes in the net barter terms of trade of developing countries highly dependent on exports of primary commodities. The G-7 CPI may be a useful deflator to use in circumstances where the major countries' inflation rate is believed to be an appropriate measure of changes in the overall price or cost level. V Notes and Definitions * Commodity market-price descriptions arc shown on page ix. * Dollars are United States dollars unless otherwise specified. * All tons refer to metric tons (1,000 kilograms) unless otherwise noted. Abbreviations and Symbols tons = metric tons lb - pounds cm = cubic meters bhl = barrels kg = kilograms mb/d = million barrels per day km = kilometers N.A. = not available MTOE = million tons of oil equivalent .1-4 = no data VI …叮；, A* S"holuol Amr-W AAW Roufm find Ewa# Abou Miabile &o awl Monh Aft o Koji mid i"romr Awthern &uj Aoki and N"Wra HunqW ArIf (0 MILVIO NOMIN RNIND Subl"Wil NOW Won AMra rwuir komIAAAW and rr4frat Aslu Muropf fina AIrm Anwnm Ammon Awins QMW JMM 1101611MI Limed Smah Now Yjahm! F*Nnmk PIRINIKI OECD PORM Cianntrin (kMMY IMINIMI hiond bly Ifth tAxambmrg WOW Nedwrk" N"" SPWU Swaim switucland Linked Kirmdunt AwJmm IWKI 1W Coundres Pmach Chum] Kufth pelynelk 1110MIN Q_ MrSin Huns Kong CYP_ Unded Arab thiandi. 0%) SIngT= Plum Ilk" 11homin 0AIr Cheardond Son Mwim ramt 27 1 23 1 M 1 8 1 21 2H 13 41 L Pam= YupAnv Rcp6k or Momd1unia. b, Odwr Aidan ownwoles--Talwan. Chhm Definitions of Groups 7bese tables classify all World Bank member economics, and all other low-imorne, $675 or less; lower-middic-inconic. $675-2.695; upper- economics with populations of more than 30.000. middle-income, $2,696-$8.355; and high-income. $9.356 or more. rhcome group. Economics are divided according to 1992 GNP per capita. 7be estimates for the republics of the former Soviet Union arc calculated using the World Bank Adas method. The groups arc: preliminary and their classification will be kept under review. Vfii Commodity Description Energy Petroleum, average OPEC price; OPEC government sales weighted by export volumes through 1981; beginning 1982 OPEC spot prices weighted by OPEC export volumes. Thermal Coal, (12,000 BTU/lb, less than 1.0% sulfur, 12% ash), f.o.b. Piers, Hampton Roads, Norfolk. Metals and Minerals Copper (LME), cash wirebars through November 1981; from December 1981 through June 1986, high grade cathodes, settlement price; subsequently, grade A. Tin (Malaysian), Straits quality, ex-smelter, Penang, official settlement price. Nickel (Canadian), electrolytic cathodes, Ni 99.9% shipping point through 1979; subsequently cathodes, minimum 99.8% purity, official morning session weekly average bid/asked price. Aluminum, indicative price of U.S. unalloyed primary ingot in the European Market through 1978; subsequent LME standard grade, minimum 99.5% purity, cash price. Lead (LME), settlement price, refined lead, purity 99.97%. Zinc (LME), settlement price, good ordinary brand through August 1984; thereafter High Grade brand. Iron Ore (Brazilian), CVRD Itabira simer feed produced from 64.2 purity ore, metal content weight, contract to Germany, Federal Republic, f.o.b. reference price through 1974; from 1975 through 1985, standard sinter feed from 64% purity ore; starting 1986 Southern System (Itabira and other southern mines) 64%; during 1988 and 1989, 64.2%; beginning 1990 64.3% purity ores. Bauxite, crude and dried, US import reference price based on imports from Jamaica through 1974; from 1975 US import price, c.i.f. US port. Gold (UK), 99.5% fine, London afternoon fixing, average of daily rates. Silver (Handy & Harman), 99.9% grade refined, New York. World Bank, International Trade Division. February 1, 1994 ix Summary The rally in metals prices that started around the end of 1993 is expected to stall, and further price increases in 1994 are likely to be limited. Significant price increases in constant dollar terms are expected for most metals over the period 1995-96. Metals prices are expected generally to tend upward in constant dollar terms during the second half of the 1990s, which can be seen as a cyclical correction of their downward movement from 1989 to date (Figure 1). Beyond 2000, the downward trend of metals prices in constant terms that has been observed since the 1960s is likely to resume. Petroleum prices are expected to average 5% lower in 1994 than in 1993, but then increase by about one third in constant dollar terms between 1994 and 2000. As with metals, the trend in the real price of petroleum in the early years of next century is likely to be slightly downward. Coal prices are projected to broadly follow those of petroleum. Historical commodity prices and forecasts are shown in Table 1. The price indices for metals and minerals and for petroleum maintained by the World Bank are presented in Table 2 and in Figure 1. The deflator used to derive the constant dollar values in Tables I and 2 is the Manufactured Unit Value (MUV) Index. This and other price indices are presented in Table 3. The forecasts are conditional on various macroeconomic and commodity- specific assumptions-all of which are subject to great uncertainty. Tables 4 and 5 indicate the price ranges within which actual prices are likely to fall with 70% probability. A comparison of our price forecasts is provided in Tables 6 and 7. Our petroleum price forecasts for the medium term are close to the average of other forecasts, as shown in Table 6. Some long-term forecasts of petroleum prices are relatively high. If these outliers are discounted, our fu:,casts are comfortably in the middle of the range. Table 7 summarizes forecasts of metals prices made by a number of metals trading and consulting firms for the 1994-1996 period. Unfortunately, long-term forecasts of metal prices are scarce from these sources. Our forecasts generally are close to the averages of others for the 1994-95 period, but tend to be on the low side for 1996. Some high price expectations that were formed in the wake of the end- 1993 rally are considered unsustainable by market fundamentals. For both metals and energy, the price projections in this report represent substantial downward revisions frm those issued in 1992 for the short-to-medium term, but no significant changes for the long term. Cyclical upturn in economic activity expected to boost metals and fiels prices. In constant dollars, the World Bank's price index for metals and minerals reached a record low in 1993 for the post-War period. Petroleum prices in 1993 (in constant dollars) were the lowest since the first petroleum price shock, but were significantly above pre- x 1974 levels. The medium-term price expectations in this report reflect the view that the lows in 1993-94 probably will be the cyclical bottoms for most of these commodities, and prices are likely to trend upward from 1994-95 onwards. The main reason for this view is that the 1991-93 economic recession that contributed to the low prices for metals and fuels may come to an end in 1994, and all mujor industrial countries may see a resumption of faster growth in the ensuing few years. This expectation is reflected in the World Bank's GDP forecast for the Group of Seven (G-7) for the 1994-96 period, which is an average annual growth rate of 2.8%. The upward momentum, however, will be dampened by the high level of stocks at hand, at least for the short term. Stocks of most base metals reached record- high levels by late 1993. The worst case is aluminum, with stocks estimated at 6 million tons or about one third of annual world consumption. Petroleum stocks at cnd-1993 were higher than a year earlier. The long-term global economic assumptions underlying the price forecasts are generally favorable for #" developing countries dependent on exports of metals and fuels. World GDP is assumed to grow by 3.2% p.a. over the 1994-2003 period--2.7% p.a. for the high-income countries and 4.8% p.a. for the low- and middle-income countries (LMICs). Developing countries outside the former Soviet bloc are expected to be growing at a rate exceeding 5% during the coming decade. Economic growth of these magnitudes implies robust growth in demand for metals and fuels. Furthermore, it is presumed that the 1990s will see relatively low inflation and low interest rates, and no sizeable, sustained appreciation of the US dollar relative to other major currencies. It has been shown that appreciation of the US dollar lowers the dollar prices of commodities, by making them more expensive to non-US consumers and hence reducing their demand. The effect of interest rates on commodity prices has been more controversial. There are both macroeconomic and microeconomic reasons why lower interest rates could boost commodity prices; in particular, low interest rates clearly stimulate capital investment and purchases of consumer durables that use metals and energy intensively. Demand for metals and fuels to grow at robust rates. World demand for base metals is projected to increase at slightly faster rates over the forecast period 1992- 2005 than during the 1980-92 period. For key base metals such as aluminum, copper, nickel, and zinc, demand growth is expected to be 2.0% p.a. or higher. For petroleum and coal, the projected growth rate of demand is 1.4%. Further declines in metals and fuels consumption that are assumed for the FSU will prevent world demand growth from being higher. The developing countries in Asia will be the main growth markets for ferrous and non-ferrous metals and for mineral fuels. In this region, rapid growth in industrial production and demand for raw materials is spreading from the newly industrialized economies, such as the Republic of Korea and Taiwan, China, to relative newcomers such as China, India, Indonesia, Malaysia. and Thailand. As in the past decade, this region will prove to be the most dynamic area for new and growing markets for raw xi P巨1 materials. Closely following this group are several countries in Latin America such as Argentina. Chile, and Mexico. where economic and political reforms will lead to higher economic growth and increasing demand for metals and fuels. China merits special attention in this regard because of its size and rapid growth in demand for metals and fuels in recent years (see Annex 11). China has taken important policy reforms and strategic decisions--freeing metals and minerals production and pricing from state control, allowing foreign participation, and investing abroad in n-dning projects to secure supplies. However, a number of serious problems still remain such as: insufficient investment in exploration. mining, and environmental control; low grade of ores available; poor technology and transport infrastructure; and inadequate legal and regulatory framework. Under a long-term GDP growth scenario of 7-8% p.a., we expect consumption of metals and fuels to grow by 4-5% p.a. depending on the conmodity. Among metals, China lacks adequate reserves of copper and iron ore, and its dependence on imports of these materials is likely to increase substantially in the years ahead. Given time and investment, China is thought to have an adequate resource base to become self-sufficient in bauxitefalumina/aluminum and nickel. China's net exports of lead and zinc will disappear as demand catches up with production capacity. China will continue to be a net exporter of tin. Limited success in discovering significant petroleum reserves will soon put China in the position of a net importer of petroleum. Although China!s coal reserves are large, some localized coal imports are likely to emerge due to inadequate infrastructure and difficulty in financing huge capacity expansion to meet demand increases. An important source of market uncertainty is the future course of the Former Soviet Union (FSU) as a net exporter of metals and fuels. There have been indications recently that RFU exports of metals have started to decline and may continue to do so in the next few years; petroleum exports have been declining since 1988. The FSU's political and economic future remains highly uncertain, as does 3- s domestic demand for basic industrial raw materials. As long as exports of metals and fuels generate vital hard currency earnings, every effort wW be made to sustain production and export capabilities. However, over the long term, the FSU needs large investments to maintain, rehabilitate-, and expand capacity. Such investments have not yet been forthcoming in Russia or most other parts of the FSU. The forecast assumes that the FSU will eventually undertake the investments required to continue exporting aluminum, copper, nickel, gold, natural gas, and petroleum, in line with its future development objectives. Developing countr*s are improving the investment climate for new mining projects. The past several years have seen a growing trend among developing countries toward privatization and liberalization of their mining industries (see Annex 1). This movement has taken essentially three different forms: divestiture of state-owned enterprises, opening up of public lands for private mining development, and reforming legal and institutional frameworks to encourage (foreign) private-sector participation. In Xiii the case of petroleum, there have been improvements in financial and fiscal incentives. Countries that have joined this growing movement in one form or another include Argentina, Bolivia, Brazil, Chile, Colombia, Ghana, Mexico, Peru, Venezuela, Zaire, and Zambia. Already, there have been clear indications that mining exploration and development investments are shifting toward these countries, away from industrial countries that are increasingly constrained by resource depletion and environmental priorities. Thus, the share of developing countries in world production of metals and fuels will continue to increase. It does not appear that policy reforms, undertaken by an increasing number of developing countries, are resulting in excessive investment in new capacities. Among the base metals, recent investment activity has focused on copper in Chile, while Mexico and Peru are also attracting increasing attention. Copper mine projects that are being considered for financing would amount to a significant increase in capacity, but they are within the bounds of expected long-tenn demand increases. Latin America is emerging as the premier supplier of metals, while Africa, among other developing regions, has fallen behind. Investments for petroleum exploration and development also have been increasingly shifting to developing countries during the past decade. This pattern will be further sustained by institutional and policy reforms, and improved fiscal and financial incentives adopted by an increasing number of developing countries. However, the impact of these changes on non-OPEC petroleum supplies is likely to be relatively small compared with anticipated increases in supplies from OPEC. The world petroleum market is expected to become increasingly dependent on OPEC supplies during the next decade. The resource base of metals and fuels is believed to be sufficiently large to meet potential increases in demand for well beyond the forecast period. Metals mines opened during the past decade typically have highly favorable cost characteristics, compared with older mines. Development of new mining technologies has helped to reduce costs dramatically. These technologies (such as the solvent-extraction electrowinning technology) will be applied in more countries and to a wider variety of ores. There have also been several cost-saving technological advances over the past decade in the exploration, development, and production of petroleum, e.g., horizontal drilling and 3-D computer seismology. The advances have been particularly striking in the North Sea, where several marginal fields have been developed. The following is a synopsis for individual metals and fuels. Metals and Minerals Copper market outlook buoyant for the short term but large capacity expansions loom over the medium term. World consumption of refined copper is forecast to grow at 2.2% p.a. over the 1992-2005 period. The most rapid growth will take place in Asia and parts of Latin America. China's import demand will become an xiv increasingly important factor in international markets. Once recovery is under way in all major industrial economies, copper demand should also increase by over 1.0% p.a. in these countries. The expectation of limited supply increases through the early part of 1995 raises some optimism for copper prices in the short term. However, substantial capacity increases thereafter are expected to result in excess supply during the 1995-1996 period. Copper prices are expected to bottom out around 1996, as the market balance turns from excess supply to that of moderate deficit, because of an expected slowdown in capacity growth and acceleration of growth in demand. Thus, in the latter half of the 1990s, copper prices are expected to trend upward reaching an indicative average level of 87 cents per pound (or $1,919/ton) in 1990 constant $ by the year 2000. Recovery of the aluminum market likely to be dragged out Slow demand growth, large capacity expansions, and increases in FSU exports in recent years resulted in 6 million tons of stocks at the end of 1993. Despite improved demand prospects in the near term, surplus stocks are not likely to be reduced unless smelters reduce capacity utilization rates significantly. The recent accord among major aluminum producers to trim production may achieve some results. Aluminum and bauxite prices are expected to recover only slowly from current depressed levels. The outlook for aluminum prices is brighter for the medium-to-long term, when stocks are expected to return to a more normal level. In the period 1992-2005, world aluminum consumption is projected to increase by 2.3% p..., compared with 1.6% p.a. in the 1980s. In the industrial countries, the fastest growth in aluminum usage is expected to occur in the transportation sector, as the automobile industry uses more aluminum to enhance fuel efficiency. The largest investments in aluminum-smelting capacity are expected to take place in countries with low-cost energy; and alumina refining capacities will be expanded in countries with bauxite resources. The share of bauxite transformed into alumina in the country of origin should continue to rise. Thus, world trade in alumina and aluminum should grow faster than that of bauxite. Outlook for steel and iron ore stagnan4 with only marginal improvements in the medium term. World steel consumption is expected to increase by only 1% p.a. over the 1992-2005 period, with almost all of the increase occurring in developing countries. The long-term stagnation of steel consumption in industrial countries results from relative sluggishness in the construction sector and the move toward stronger, lighter, smaller products and materials. China has shown the fastest growth in steel consumption in recent years, but the growth is expected to slow to about 4% p.a. over the forecast period. Steel production is expected to increase most in those developing countries that have growing demand for steel or large iron ore reserves. Significant capacity cuts are xv expected in the EU member countries. Privatization of steel industries in Latin America has brought new investment and profitability, but this has also resulted in higher market concentration in these countries and intensified trade friction. New technologies such as thin slab casting, steel scrap substitutes, and computer controls have enabled more developing countries to develop competitive steel industries. The demand for iron ore will closely track steel production over time and across regions. The largest growth in consumption and imports of iron ore is expected to take place in Asia. Australia and Brazil will continue to dominate iron ore production and exports. China and India should emerge as important iron ore producers, but mostly for their domestic steel industries rather than for export. Long-term outlook for nickel markets promising. Low nickel prices and ever-increasing industrial applications are expected to result in a 2% p.a. growth in nickel consumption over the period 1992-2005. Production cutbacks in 1994 will be followed by one new project coming on-stream by 1995. As a result, the supply and demand balance will improve, as demand increases faster than production. FSU nickel production is foreseen to recover gradually to 260,000 tons by the year 2000, and the FSU will remain a low-cost producer. After working off some of the excess stocks in 1994, nickel prices are likely to recover substantially during the period 1995-2000, to a level more closely reflecting its costs of production. Energy Petroleum prices expected to increase in the second half of the 1990s. Petroleum prices are expected to remain relatively low for the next couple of years. In the latter half of the 1990s, the oil balance is likely to tighten due to rising demand and declining supplies in certain non-OPEC countries. As OPEC's capacity utilization rate rises, petroleum prices are expected to increase in real terms during the latter part of the decade, reaching $17.50/bbl (in constant 1990 dollars) in 2000. Real oil prices are projected to decline slightly beyond 2000, due to a slowdown in demand growth and capacity increases in OPEC and certain non-OPEC countries, notably the FSU. World petroleum consumption is expected to grow by 1.4% p.a. over the forecast period. The largest growth will be in the developing countries (particularly Asia) where demand is projected to rise by 3% p.a. Oil demand in the industrial countries will continue to show moderate growth of less than 1% p.a. partly due to efficiency improvements, fuel substitution, and higher energy taxes. In the FSU and Eastern Europe, demand is expected to increase in the latter half of this decade. Non-OPEC oil production (outside the FSU) is projected to increase by 1.6% p.a. over the forecast period, with declines in industrial countries being more than xvi offset by increases in a number of developing countries. FSU production is likely to recover in the latter part of this decade and exceed the 1992 level by the end of the forecast period. Most of the projected increases in world oil output occur in OPEC countries, mainly in the Middle East. OPEC's share of world production is seen to increase from 39% in 1992 to 46% in 2005, while the output share of the Middle East OPEC countries will rise from 29% to 36%. Coal market to remain weak in the medium term. The weakness in thermal coal prices is likely to persist in the medium term because current available export capacity exceeds import demand by a wide margin, and this excess capacity has the potential to become even larger. Prices are expected to recover over the long term to a level more representative of production costs of the major exporters. World demand for coal is forecast to grow by 1.4% p.a. during the 1992- 2005 period. The share of coal in world thermal power generation is not expected to change significantly over the forecast period. At current relative fuel prices in international markets, coal still has a cost advantage over petroleum as a thermal power fuel. There are a number of coal mining projects--new mines and extensions of existing mines--that could be brought into production by 2000. Most of these are located in Australia, Colombia, Indonesia, and South Africa. xvil Table 1: Commodity Prices and Price Pro jeodone a/ Actual Pol.tions 1970 1980 1985 1989 1990 1991 1992 1993 1994 1995 1996 2000 2005 (Current Dollars) Inom Petroleum Sibbi 1.3 30.5 26.7 16.3 21.2 17.3 17.3 15.3 14.5 15.5 17.0 22.8 25.0 Coas S/mt N.A. 43.0 47.0 41.0 42.0 42.0 41.0 38.0 38.0 40.0 42.0 51.0 53.0 Metal. & Mineral. Copper Shut 1.413 2,182 1,417 2.B48 2.662 2,339 2.281 1,913 1,800 1.800 1.720 2,500 2,00 Tin 0/kg 359 1.644 1,154 853 609 548 599 511 510 550 575 750 850 Nickel Sknt 2,846 6,519 4,899 13,308 8864 3.156 7,001 5.293 5.400 5,50 6.150 9,750 1t.260 Aluminum Shmt 540 1,775 1,041 1,951 1.639 1.302 1,254 1,139 1.225 1,300 1,400 1.825 2.060 Lead Shat 304 906 391 673 811 558 541 406 500 550 580 800 820 Zinc Simt 295 761 783 1.659 1,513 1,117 1,240 962 1,030 1,100 1.200 1.550 1,000 Iron Ore $1mt 9.8 28.1 28.6 26.5 30.8 33.3 31.6 28.1 26.8 28.0 29.5 33.0 37.0 Bauxite Simt 12.0 32.0 35.7 35.5 35.5 37.3 36.3 35.0 35.0 36.0 37.5 40.5 44.0 Gold S/toz 36 608 318 381 384 382 344 360 400 420 440 500 540 Silver Chaz 177 2064 614 550 482 404 394 430 510 530 550 620 650 (Constant 1990 Dollars) Inra Petroleum 8/bbI 5.2 42.4 38.9 17.2 21.2 17.0 16.3 14.2 13.1 13.6 14.5 17.5 17.0 Coal S/rt N.A. 60.0 68.0 43.0 42.0 41.0 38.0 35.0 34.3 35.1 35.8 39.2 40.2 Metals & Minerals Copper S/mt 5.634 3.032 2.066 3.009 2.662 2.288 2.139 1,785 1.624 1,579 1,464 1,919 1.771 Tin Ckg 1,432 2.294 1.582 902 609 538 562 476 460 482 489 576 579 Nickel S/nt 11,348 9,058 7,142 14,061 8,864 7.978 6,566 4.939 4,872 5,131 5,235 7.486 7.662 Aluminum Shut 2,153 2.466 1.517 2,062 1.639 1,274 1.176 1.063 1.105 1.140 1.192 1.401 1,403 Lead S/mt 1,212 1.259 570 711 811 545 508 379 451 482 494 614 558 Zinc S/Mt 1,176 1,057 1.141 1.753 1.513 1.093 1,163 898 929 965 1,021 1,190 1,090 Iran Ore S/mt 39.2 39.0 38.7 28.0 30.8 32.5 29.7 26.3 24.2 24.6 25.1 25.3 25.2 Bauxite Stht 47.8 44.5 52.0 37.5 35.5 36.6 34.0 32.7 31.6 31.6 31.9 31.1 30.0 Gold S/toz 143 845 463 403 384 354 322 336 361 368 375 384 358 Silver C/taz 706 2,867 895 581 482 395 369 401 460 465 468 476 443 N.A. a Not Availae. a/ Data have been rounded. Source: World Bank, International Econonica Deparent, International Trade Division. February 23, 1994 xviii Table 2: Weighted Indices of Comnmdity Prie, 1948-2005 ad -Currant US Dollm-- -Constant 1910 US Dollars- Petroleum Metals Petroleum Metals & & Minerads Minerals 1948 10.1 23.5 56.1 121.6 1948 8.9 23.9 48.3 129.2 1950 8.0 23.9 49.1 148.8 1951 8.0 30.4 42.6 161.5 1962 8.0 33.4 40.6 169.6 1963 8.5 29.7 44.1 154.6 1954 8.9 28.8 47.6 153.4 1956 8.9 33.2 48.8 173.9 1956 8.9 34.4 45.2 173.7 1957 8.9 30.6 44.3 151.4 1958 8.5 28.9 41.1 140.4 1969 7.5 29.3 37.1 144.6 1960 7.1 29.5 34.1 142.3 1961 7.1 28.9 33.5 136.4 1962 6.6 23.6 30.6 133.2 1963 6.6 28.8 31.2 136.3 1964 6.1 35.7 28.6 166.7 1965 6.1 40.9 28.3 189.3 1966 6.1 42.7 27.3 190.8 1967 6.1 38.9 27.1 163.4 1968 6.1 37.7 27.3 168.5 1969 6.1 42.5 25.9 180.2 1970 6.1 42.8 24.4 170.7 1971 B.0 38.5 30.3 146.0 1972 8.9 39.1 31.0 135.7 1973 12.7 53.2 38.0 159-2 1974 52.7 77.3 129.5 189.8 1976 51.3 68.3 113.5 151.1 1976 56.1 70.9 120.2 154.9 1977 60.2 79.4 119.8 157.9 1978 50.7 83.8 104.8 144.7 1979 87.5 103.1 133.4 157.1 1980 143.5 115.8 199.3 160.9 1981 161.4 103.1 223.3 142.6 1982 145.8 95.4 204.8 134.0 1983 132.4 96.6 190.5 139.0 1984 129.6 90.0 190.3 132.2 1985 125.6 85.5 183.0 124.6 1986 63.5 71.4 78.5 88.3 1987 81.1 80.1 91.3 90.2 1988 64.1 104.1 67.3 109.2 1989 75.8 110.1 81.0 116.3 1990 100.0 100.0 100.0 100.0 1991 81.6 91.3 79.8 89.9 1992 81.2 90.6 76.1 84.9 1993 71.8 77.4 66.9 72.2 1994 8.2 76.6 61.5 69.0 1995 72.9 79.8 64.0 70.0 1996 80.0 82.3 68.1 70.0 2000 107.1 106.3 82.2 81.6 2005 117.6 116.1 80.1 79.1 at Figumre for 1994 to 2005 are projections. Souros: Wovld bank, Intenaonol Economicm DeparUenat. International Trade Division. Febnary 23, 1994 xix Tab L: 0eS Iuan~: TMdas is4 and A@sm~s fr 1W13-2006 a9 -0-. ffln bi.-- - US GP Dener - 64 GDPIONP Deste el - 0-7---d.- Yer 1990.100 % Chus 1910=100 %ømangs 1N0.100 % Ch..ge lo00lo %@ 1948 19.3 17.7 7.0 194 10.5 -3.0 17.6 -0.5 13.3 1950 16.3 -11.9 17.0 1.5 12.4 -6.5 1951 18.6 ls.3 18.8 5.6 13.7 10.0 1962 18.7 4.8 19.0 0.9 14.3 4.3 1963 18.2 -2. 1.4 2.3 14.4 14. 0.9 1964 18.8 -2.2 1. 0.9 14.6 1.0 14.7 1.6 19e 19.1 1.8 20.2 3.2 14.9 2.2 14.7 0.4 1966 19.5 3.1 20.0 3.1 15.1 4.2 1.0 Li 1967 20.2 2.1 21.6 3.4 16.1 3.2 16.4 .a 1968 20.1 1.7 22.0 2.1 16.3 1.2 15.7 li 1959 20.3 -1.4 22.6 2.0 16.3 0.0 IL 4.2 1960 20.7 2.1 23.0 1.6 16.7 2a 1s.9 1.9 1961 21.1 1.7 23.2 1.2 17.2 3.4 16.3 tA 1962 21.5 2.0 23.0 2.3 17.0 3.7 1.O .e 19863 21.1 -1.0 24.0 1.1 10.4 2.6 17. 31 1964 21.4 1.8 24.5 1.8 1M.O 2.8 17.1 Lg 1965 21.8 0.7 25.1 2.5 19.4 30 1M.3 La 1968 22.4 3.5 25.0 3.5 20.1 3.3 18.8 3L 1967 22.0 1.2 28 3.1 20.7 3.1 10.4 L 1966 22.4 -1.0 20.1 5.0 21.4 3.7 20.0 ss 1969 23.6 6.4 2M.G 5.0 22-1 2. 20.0 4A 1970 25.1 t.3 31.1 5.4 23.6 .7 22.1 6.1 1971 26.4 5.4 32. 5.4 2Lt ILO 23.6 6.7 1072 28.8 9.0 34.3 4.6 20.1 10.3 26.0 104 1973 33.4 156 3.S 8.4 31.0 13.4 20.8 14.3 1974 40.7 21.8 39.7 8.7 34.7 .1 33.0 16.7 1976 4.2 11.2 43.5 LI 30.3 13.1 37.0 1Z4 1976 46.8 1.4 4.2 6.3 40.4 ta 38.2 .3 1977 0.3 Li 49.4 ti 44.0 2.0 42.3 103 1078 57.O 1.1 53.3 7.9 61.2 18A 51. 21 1079 66.6 13.3 57.0 5.6 67.1 11.5 4., 1990 72.0 0.7 63.3 0.6 63.1 10.4 81.3 11.8 1991 72.3 0.4 S0.7 10.0 62.7 .0.7 O1. Ga 1912 71.2 -1.5 74.0 t2 62.2 .0.7 51.0 -;. 1963 69.6 -2.3 77.0 4.1 62.5 0.5 o2.0 1. 1984 68.1 -ti 0.4 4.4 61.7 -1.2 61.8 .0, 1996 68. 0.8 B3.4 3.7 63.1 2.2 63.1 2.0 1986 80.3 17.0 86.6 t7 76.6 21.3 76.1 27 1987 98.6 9.8 18.3 3.2 8.3 12.8 o".0 13.0 1988 9.3 7.3 91.5 3.6 92.1 6.7 92.8 7.7 1909 94.7 -0.7 95.9 4.7 91.3 .0.8 92.2 -0, 1990 100.0 5.7 100.0 4.3 100.0 9.6 100.0 O.X 1901 102.2 2.2 10.1 4.1 104.6 4.8 10i. .1 1992 106. 4.3 106.8 2.6 110.8 5.9 110. .o 1903 107.2 0.6 109.8 2.8 114.5 3.4 113.0 19D4 110.0 3.4 113,4 3.2 117.3 2.4 116.4 Le 199 114.0 2.0 116.7 2.9 110.8 ti 110.4 2. 19m 117.5 3.o 120. 3.1 122.8 2. 122.9 fL 1997 120.7 27 123.7 2. 126.0 t. 12.u 199 123. 7 127.2 ta 120.6 2.7 13C.3 3.0 19gg t27.1 2.5 130.5 2.6 132.3 2.2 133.7 2. 2000 130.3 2.6 1334 2.3 136.0 2.0 137.0 2. 2001 133.4 24 13.8 1.9 137.9 2.1 140.u 2L 2002 136.8 24 139. 2.1 140.7 ti 143.8 34 2006 146.8 2.4 140.5 2.3 150.2 2.2 154.9 L al Flome far 1993 om temai bl Unit valus ki~ be US dar tem ef memudfhss eiisertd ~ m Om G. - su. CR=a. Gm~men..pen. UK. and Ul wigtiø pmpndey t em omsis' .peam"t fn th deudespb eøl uu~s. cl Aggega indum et GDPIONP delistre km US uear flssu er te 0.6 semnise, ukin ECAasud mnlbg wSigUh. dl Aggregams aensmr pa.o in im US dSller iisth O-7 counres and 1993-2885(PJSSce) (Acual) P cdoftHa u a~ tWmm 1980 1991 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1995 2000 2005 -91 -2005 1991 2005 (lOOs ofmetaloann -(%pa)- -(%)-- MhCne Production Highlncom 17.8 15.1 18.2 17.9 16.9 17.8 16.6 12.? 8.7 .1 9.5 11.5 11.5 -.7.0 -03 6.6 5.1 Australia 11.6 6.4 8.5 7.7 7.0 7.8 7.4 53 6.6 6.0 6.5 65 7.0 -6.3 1.5 3.0 3.1 Canada 0.2 0.1 2.4 3.4 3.8 3.4 3.8 4.5 0.0 0.0 0.0 2.0 2.0 n.i. D. 2.4 0.9 U.K. 3,3 5.2 4.3 4.1 3.5 4.0 3.4 2.3 2.0 2.0 LO 1.5 1.0 -3.2 -5.i 1.2 04 Other 2.7 3.4 3.0 23 2.6 2.6 2.0 0.2 0.1 0.1 1.0 1.5 1.5 -21.1 15.5 0.1 0.7 LMICS 217.9 182.9 165.9 167.9 190.6 214.4 199.1 178.4 160.5 1633 176.5 198.5 216.0 -1.8 1. 93.4 94.9 Americas 36.0 47.2 42.5 44.3 59.4 71.7 61.6 52.7 48.4 56.6 605 71.0 75.5 3.5 2.6 27.6 33.2 Bolivia 27.5 16.1 10.5 8.1 10.5 15.8 17.3 16.8 16.5 16.6 19.8 21.5 22.5 -4-4 2.1 8 9.9 Brazil 6.9 26.4 264 304 44.0 50.2 39.1 29.3 213 24.0 28.0 36.5 40.0 14.0 22 15.3 17.6 Pem 1.1 3.8 4.6 5.3 4.2 5.1 4.8 6.6 10.2 16.0 13.7 13.0 13.0 17.7 5.0 3.5 57 Other 0.5 0.9 1.0 0.5 0.7 0.6 0.4 0.0 0.0 0.0 0.0 0.0 0.0 -29.9 0.0 0.0 0.0 AsiaandPacific 152.9 110.1 100.4 101.3 109.1 121.8 117.4 107.9 95.2 91.8 100.5 109.0 116.5 -3.1 0.5 563 51.2 China 16.0 20.0 25.0 28.0 35.0 41.0 41.0 42.0 38.7 38.0 41.0 45.0 48.0 9.2 1.0 22.0 21.1 Indonesia 325 21.8 24.6 26.2 29.6 31.3 30.2 30.1 29.4 29.5 29.5 27.5 27.5 -0 -0.6 15.8 12.1 Malaysia 614 36.9 29.1 304 28.9 32.0 28.5 203 14.3 14.3 17.5 22.0 22.0 -94 0.4 10.8 9.7 Thailand 333 16.6 16.8 14.8 14.0 143 14.6 10.9 8.4 6.0 8.0 9.0 9.0 -9.8 -lA 5.7 40 Other 9.3 14.8 4.9 1.9 1.6 2.8 3.1 4.2 4.4 4.0 4.5 5.5 10.0 -7.0 6.4 2.2 44 Europ 16.5 16.4 16.4 15.6 15.7 14.6 141 15.1 15.0 13.3 13.5 16.0 20.5 -0.8 2.2 7.9 9.0 FSU 16.0 16.0 16.0 15.0 15.0 14.0 13.0 12.0 12.0 10.3 10.5 12.0 15.0 -2.6 1.6 6.3 6.6 Other 0.5 0.4 0.4 0.6 0.7 0.6 1.7 3.1 3.0 3.0 3.0 4.0 5.5 18.0 4.2 1.6 24 Middle East/North Africa 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 a. m. 0.0 0.0 Afrlica 12.5 9.2 6.6 6.7 6.4 6.3 5.4 2.7 1.9 2.0 2.0 2.5 3.5 -13.0 1.9 1.4 1.5 World Total 2353 198.0 184.1 185.8 207.5 2322 215.7 191.1 169.2 171.8 186.0 210.0 2275 -1.9 1.3 100.0 100.0 Rened Prodution World Total 240.0 216.2 203.5 199.6 214.5 230.2 233.5 204.2 1827 185.0 200.0 225.0 245.0 -1.5 1.3 OSA/DLA Sales 0.0 3.1 5.5 4.1 2.9 2.1 6.0 8.9 8.4 10.0 10. 10.0 Soroes: Metallgesellschaft AG, MrCLSrskr varlous iunes. World Bureau of Metal Stasdcs. W d Metal Stni~i Demer 1993 (acu Word Bank Ia Department (projeted). (c) The largest Brazilian tin-exporting company, Paranapanema, has realized that large production increases in the face of a declining market may not be in its own interest. China is now the largest tin producer. China became the second most important producer of tin-in-conccntrate in 1989, having increased production from 16,000 tons in 1980 to 41,000 tons in 1989 (Table 2). Today, China is the world's largest producer of tin-in-concentrate, accounting for 22% of world production in 1992. It is also among the three largest net exporters of tin (refined tin plus tin-in-concentrate). An intergovernmental group of tin-producing countries has been formed to manage excess supply. After the collapse of the ITC in late 1985, seven major tin-producing countries (Australia, Bolivia, Indonesia, Malaysia, Nigeria, Thailand, and Zaire) formed the ATPC. Brazil and China have only been observers. China, however, has decided to become a full member beginning in January 1994. The ATPC's main function has been to implement Supply Rationalization Schemes (SRS), or export quotas, in the face of declining demand and prices. Table 4 shows the export quota allocations under the SRS in the 1991-94 period. Export quota limits agreed upon by Brazil and China are also shown in Table 4. These efforts, however, have had only limited success. Although most of the members complied with their export quotas, their mine production volume was not always controlled well. For instance, in the declining market since 1989, Brazil did cut back mine production sharply, but China did not reduce production as much. Potential for tin supply in selected major producers. Table 2 provides forecasts of mine and smelter production of tin in terms of metal content. A brief description of our expectations for the most important tin-producing countries is given below. BouviA: Bolivia's tin industry has been restructured, partly with World Bank assistance. Since Bolivia's tin production comes mostly from underground mines, it had one of the highest production costs and ;ts production level had steadily declined until the mid-1980s. Current plans call for steady production increases, to almost double the present level by 2000. Reorganization of COMIBOL and assistance given to small-and-medium-scale mines have reduced costs. Furthermore, although not yet proven, Bolivia has the potential to find low-cost tin resources in areas close to Brazil's Rondonian tin province. However, it seems likely that the planned increases will not be fully realized because of the relatively low tin prices expected in the 1990s. BRAzIL: The recent discovery of the Suracananus deposit in the Roraima province, probably the largest ever in Brazil, could invite another run by garimpeiros unless the government continues to enforce strict controls. It is highly likely that other large deposits will be found in the future. From known deposits alone, Brazil's production could easily reach more than 60,000 tons of tin-in-concentrate in a few years, unless some controls are exercised. Currently, Brazil has the lowest production cost in the world. What happens in Brazil will critically affect the future of the world tin market. We assume that Brazil will continue to exercise restraint on mining of tin in the interest of environmental conservation. 86 CHINA: China has emerged as the most important producer of tin, with production of tin-in-concentrates reaching 38,700 tons in 1992 and an estimated 40,000 tons in 1993. China's tin resources are believed to be large enough to support further substantial production increases. However, as China will reduce the indirect subsidy being provided to its Lin mining industry through underpricing of some of the inputs (such us energy) in the future, China's international competitiveness in Lin mining is likely to be contained, to sonic extent. SOUTHEAST ASIA: Characteristics of tin mining are similar in Malaysia, Indonesia, and Thailand. Gravel pumps and dredges are the two dominant mining techniques used in Southeast Asia. The long history of tin mining in these countries has resulted in declines in ore grade and cost increases. As tin prices declined since 1990, tin production in these countries declined dramatically. In the 1990s, given the relatively gloomy forecast for tin prices, production in these countries is likely to recover but only to stabilize at below the peak levels of the 1980s. In particular, production in Malaysia is unlikely to recover to anywhere near the levels achieved in the past, as the bright prospects for Malaysia's continued rapid industrial development will result in a rapid rise in labor costs. US disposals a significant factor in supply. In considering the market prospects for tin, one important factor that must be taken into consideration is the existence of the huge stockpile of tin in the US DLA. At the end of 1992, DLA stocks of tin amounted to 153,900 tons, or equivalent to almost 90% of world mine production in 1992. All of the DLA stocks of tin were declared an unnecessary surplus and were to be sold off over time. It appears that annual disposals from this stockpile have been stepped up in recent years. The DLA sold 8,900 and (estimated) 8,400 tons, of tin during 1992 and 1993, respectively, compared with 2,900 and 2,100 tons in 1989 and 1990, respectively (Table 2). Current US government sales plans target a release of 12,000 tons (the amount authorized by the Congress) each year until stocks are completely depleted. However, it is likely that the actual tonnage of annual releases may fall short of this target as in the past. It will probably take 15 years or more to complete the disposal program. It is far from clear whether the US government will change its policy and determine the amount of annual disposal more flexibily in the future, i.e., taking account of prevailing market conditions and tin prices, or selling less at times of depressed prices and more when prices are high. We assume that DLA tin releases would continue to act as an additional "mine above the ground" for the projection period. Secondary share small and not likely to increase. In the forecast period, the role of secondary supply of tin is not expected to change significantly. The statistics on refined tin production and consumption cited in Table 3 in fact include secondary refined tin, but tin contained in scrap that is recycled without going through refining process is excluded (separately shown as "scrap recovery" in Table 3). Secondary refined tin accounts for only a small portion of total refined tin pmduced, usually less than 5%. 87 Tade 3: Tin - Coniumnpln Mine Preducin, Renlned Produells and Smrp Rucvery 1%1-92 (0110 Ion) Se~onduy 5Sen Conmump Rafined Mina P. Samp Refined Appmnint Shin in Your -tion Produi on duction Rcovery Icducilan Stck Chngmen Rfined Relln Ralla Rallo /a (A) la (11) (C) th () 1e (s) A-B l-C (IN)'l00 C/A l/A Cm! 1961 201 200 190 59 na 2.5 10.4 1.^ 0.94 0.99 0.95 1%62 194 199 194 53 n.1. -5.4 5.0 D.å 1.00 1.03 0.97 1963 196 19H 194 57 n.. -2.2 3.9 n,.A 0.99 1.01 0.98 1#464 207 19H 199 60 n.&. 8.6 -I.0 .a. 0.96 0.95 1.01 1965 206 204 204 59 nA. 2.9 -0.8 na. 0.99 0.99 3.00 1%6 209 210 216 61 nA. -0.6 -6.5 n.a. 1.03 1.00 1.03 167 210 214 207 59 4 .4.1 6.4 1.6 0,99 1.02 0.97 1968 211 224 215 54 4 -12.4 8.2 1.7 1.02 1.06 0.96 1969 220 217 212 54 3 3.4 5.0 1.5 0.96 0.98 0.98 1970 216 220 218 52 4 .4,8 2.8 1.6 1.01 1.02 0.99 1971 222 224 222 SI 3 -2.3 2.2 1.4 1.00 1.01 0.99 1972 224 232 231 46 7 -8, 1.6 2.9 1.03 1.04 0.99 1973 251 227 224 50 9 24.3 2.1 3.3 0.89 0.90 1.99 1974 239 228 222 40 8 11.1 6.5 3.6 0.93 0.95 0.97 1975 211 226 219 35 a -14.9 7.0 3.4 1.04 1.07 0.97 1976 234 226 219 31 7 8.5 6.8 2.9 0.93 0.96 0.97 1977 221 223 225 41 8 -2.4 -1.6 3.4 1.02 1.01 1.01 1978 224 236 236 43 8 -12.5 0.4 3.4 1.05 1.06 1.00 1979 224 247 238 43 9 -22.7 8.3 3.7 1.06 1.10 0.97 1980 213 240 236 40 11 -26.7 4.0 4.5 1.11 1.13 0.91 1981 207 243 239 36 11 -35.9 4.3 4.5 1.15 1.17 0.91 1982 200 227 226 31 9 -27.1 1.2 3.9 1.13 1.14 0.99 1983 202 208 210 32 10 -5.6 -2.5 4.6 1.04 1.03 1.01 1984 213 224 205 35 10 -11.3 19.1 4.5 0.96 1.05 0.91 1985 214 216 197 32 11 -1.9 19.1 4.9 0.92 1.01 0.91 1986 225 204 184 31 8 21.2 19.1 4.0 0.82 0.91 0.91 1987 226 200 186 34 7 25.2 14.5 3.7 0.82 0.89 0.93 1988 234 215 208 35 9 19.8 6.9 4.3 0.89 0.92 0.97 1989 238 230 231 35 9 7.5 -1.1 3.9 0.97 0.97 1.00 1990 238 234 215 40 8 4.3 18.5 3.3 0.90 0.98 0.92 1991 217 204 191 33 5 12.5 13.0 2.5 0.88 0.94 0.94 1992 200 183 169 35 l 16.9 13.5 0.5 085 0.92 0.93 al Including seondary refined dn. bl Excluding secondmry refined in. c Data rar seconday refined tin included in (B). Sources: Meallgesellschaf AG, MeuILSiunri 1980-90 World Bureau of Metul Sdsdgcs, Wndd Mn c December 1993. 88 Table 4. Export Quotas under ATPC's a/ SRS, 1991-94 1991 1992 1993 1994 --------------- '000 tons (metal content)--------- ATPC members Australia 6.9 6.0 6.5 6.5 Bolivia 12.6 12.0 16.3 16.0 Indonesia 28.4 28.0 30.5 30.5 Malaysia 28.6 24.8 20.0 14.0 Nigeria 0.9 0.8 1.5 1.9 Thailand 17.1 14.5 13.5 8.0 Zaire 1.4 1.0 1.1 1.1 Total 95.9 87.1 89.4 78.0 ATPC Observers Brazil n.a. 28.0 24.0 26.2 China n.a. 15.0 15.0 20.0 Source: CRU Monitor - Tin, various issues. Price Outlook Exchange stocks have risen steadily since 1989 but total reported stocks have not. After tin prices peaked at over US$10/kg in Aptil 1989, reported tin stocks increased from 43,000 tons in March 1989 to 58,700 tons at the end of September 1990 (see Table 5), while tin prices declined to below US$6/kg (July-September 1990). The price decline and stock increase were caused mainly by sharp production increases. As the worldwide recession deepened during the 1991-93 period, tin prices edged down further despite short-lived upswings in 1992 and 1993. Reported stocks, which actually declined until the second quarter of 1992, have been climbing again, to reach 48,800 tons by the end of 1993. The Kuala Lumpur Tin Market (KLTM) price fell below US$4.50/kg in September 1993. Small price increases likely in near term. In the near term, we expect tin prices to rise slowly during the 1994-96 period (Table 6). The short-term outlook is based on the assumption that cooperation among all major tin-exporting countries under the aegis of the ATPC will be moderately successful in managing potential excess supplies so that stocks should decrease over this period. 89 Table 5. Tin Stocks at End or Quarter, 1989-93 Total KLTM LME Year Qtr Reported la LME Penang +Penang ---- '000 tons)---- 1989 1 43.0 1.5 12.5 14.0 2 46.5 2.7 11.0 13.7 3 46.5 4.2 12.4 16.6 4 47.9 9.1 12.8 21.9 1990 1 54.8 10.2 11.2 21.4 2 54.0 12.4 12.7 25.1 3 58.9 12.1 14.0 26.1 4 56.7 20.8 9.1 29.9 1991 1 56.8 19.0 12.2 31.2 2 50.2 15.2 9.5 24.7 3 48.0 13.9 10.0 23.9 4 47.9 13.7 9.5 23.2 1992 1 44.2 12.0 9.0 21.0 2 43.3 12.8 8.5 21.3 3 43.6 14.9 8.5 23.4 4 45.7 15.4 8.5 23.9 1993 1 46.6 19.3 9.0 28.3 2 47.0 20.6 8.5 29.1 3 47.7 20.9 8.5 29.4 4 48.8 20.1 9.0 29.1 a/ Includes stocks held at exchanges (LME, KLTM), producers, consumers and traders. Source: World Bureau of Metal Statistics; MetaWek; CRU Metal Monitor-Tin. Price recovery possible if Brazil and China restraint production expansion. Over the longer term, the market balance will critically depend on the extent of production expansion in Brazil and China. Under the assumption that Brazil's production, which has declined sharply since 1991, and China's production will increase only gradually to levels approaching 40,000 and 48,000 tons, respectively, by 2005, prices are expected to recover to US$5.75- 5.80/kg in 1990 dollar terms by the 2000-05 period (Table Al). 90 Tabe Al: 'M - Pdcss, 1950-1993 (ACu Mand 1994-2005 (Prolected) Unn: US ka Current $ ---- - 1990$(MUV) a/ --- --1990$(G-7 CPI) bl Year LME Cs c/ Kuala Lumpur &1 LME Cash Kuala Lumpur LME Cash Kuala Lumpur 1950 206 1,261 1.661 1951 298 1.583 2.169 1952 266 1,348 1,856 1953 201 1,048 1.391 1954 19 1,055 1.350 1955 204 1.067 1.388 1956 217 1.096 1.443 1957 208 1.029 1.353 1958 203 200 987 1,296 973 1.277 1959 216 214 1.066 1.056 1.382 1.369 1960 220 213 1.063 1.029 1.381 1.337 1961 245 241 1.164 1.145 1.503 1.479 1962 247 242 1.160 1.127 1.474 1.444 1963 251 246 1.191 1.168 1.451 1.422 1964 341 335 1.591 1.563 1.921 1.887 1965 389 380 1.902 1.760 2.123 2.074 1966 357 349 1.597 1.562 1.885 1.843 1967 333 324 1.473 1.433 1.714 1.668 1968 313 306 1.398 1.367 1.567 1.532 1969 343 338 1.453 1.432 1.646 1.622 1970 367 359 1463 1.431 1.660 1.624 1971 350 342 1.324 1.294 1.483 1,449 1972 377 368 1.309 1.277 1.448 1.413 1973 483 472 1.447 1.414 1.623 1.586 1974 820 784 2.017 1.928 2.488 2.379 1975 687 669 1.520 1.480 1.855 1.807 1976 758 747 1.654 1.630 1.981 1.952 1977 1.076 1.071 2.137 2.128 2.544 2.533 1978 1.291 1.252 2.228 2.161 2.491 2.416 1979 1.548 1.482 2.356 2259 2.619 2.702 1980 1.678 1.644 2.332 2.284 2.736 2.681 1981 1.416 1.406 1.960 1.946 2.291 2.274 1982 1.293 1.295 1.803 1.820 2.102 2.122 1983 1.299 1.303 1.868 1.874 2.095 2.101 1964 1.227 1.246 1.803 1831 1.984 2.015 1965 1.195 1.154 1.742 1.682 1,894 1.929 1966 l 616 762 809 1987 669 753 778 1968 705 740 761 1989 853 901 925 1990 621 609 621 609 621 609 1991 560 548 548 536 533 522 1992 611 599 572 563 551 541 1993 516 511 481 477 456 452 pro~ete 1994 510 460 438 1995 550 482 461 199 575 489 468 2000 750 576 548 2005 650 579 549 aW Deflated by G-5 Manufacturing Unit Valuc (MUV) bidux. bl Delated by G-7 Consumnr Pfice Index (CP. c/ London Mela Excha (LME). standard grad, mnfimum 99.75%an. stsemnt uric. dt For 1950-1964. Malalan. Strejs, minimum 99.85% sn, offcal sellg prim. ex-smeter, Penan; beginrilnm 1985. Kuala Lumpur Ti Maret (KLTM). setiemnt ice. e/ Durm Octobar24. 1985rcunh June 1990.1|n trading at1he LME was suspended. Soumrc Intemailnel Tn Counc.i . M(atual : Wod Bank. Intemaional Economics Depadment ........................... ........ t% P,&,) ........ Hieh-ncs 7,735 10,6% 12.052 11,938 12.466 12.428 12709 13,020 13,806 14,777 1.6 2.2 1.3 OECD 7,679 10.549 11,971 11,51 123 12,313 12,59 12,8W 13,66 14,627 1.6 2.2 1.3 United State* 3,707 4,561 4,30 4,137 4,654 4,690 4,75 4.850 4,705 4,50 0.2 0.5 0.3 Uerany 976 1,344 1,379 1.361 1,476 1,430 1,450 1,471 1,535 1,620 1.4 1.3 0.7 France 356 579 721 734 716 720 730 50 829 900 2.5 2.3 1.8 Japn 897 1,671 2,414 2.432 2.298 2,250 2.325 2,450 2.800 3,200 3.5 4.0 2.6 LNICS 2,530 4,620 5,845 5,233 5,659 5,796 6,052 6,378 7.904 9,43 3.5 1.9 4.0 Amricas 200 544 734 70 691 708 753 96 960 1,125 6.1 4.2 3.8 Asla and Pacific 416 1,025 1,%0 2,162 2,667 2,747 2,816 2,980 3,503 4,115 6.9 6.4 3.4 Eur0p0 1,829 2 824 2,627 1,830 1,779 1,809 1,911 2,039 2,79 3,420 1.2 -1.8 5.2 FSU 1,318 1,558 1,700 1,100 1,150 1,150 1,200 1,250 1,700 2,060 0.5 -2.4 4.6 M. East & N. AfrIce 22 118 382 392 375 33 391 409 502 590 13.6 9.4 3.5 World 10,265 15,316 17,897 17,171 18,125 18,224 18,761 19,39 21,711 24,211 2.2 2.1 2.3 8/ Least squarøs trønd for historicaL period. <1970.91; .nd-polnt for projected perlads (1992-2005). bl Etimate. ources: Hetalmaesehlchaft, Netal Statistics £ World Ouresu of HeteL stattstIcs (etufi); World Bank, Internationat Economics eprtmnt (projected). Table A9. Primry Atutnua - Gross Exports By Nain Countries and Ecunmic Regiov Actual Projected Groth Rat"s a/ Aversges Cormtries/ ---------------- 1992- Economies 1969-71 1979.81 1990 1991 1992 b/ 1993 1994 1995 2000 2005 1970-91 190-91 2005 - .....-...-............-.........-... ('000 Tng) ...•.. . ..- .......-...• ..•. Z p.e.) - High-Incowe 1,998 3,177 5,665 6,075 6,198 6.137 6,344 6,821 8,472 10,220 5.4 5.3 3.9 OECD 1,998 3,145 5,407 5,722 5,743 5,682 5,859 6,306 7,872 9,370 5.1 5.2 3.8 Canada 791 687 1,253 1,470 1,603 1,600 1,650 1,650 2,000 2,300 3.6 5.4 2.8 United states 261 381 798 903 658 650 670 750 850 1.000 7.6 6.0 3.3 ethertand 72 359 362 332 336 335 340 400 420 500 4.6 -0.7 3.1 France 154 175 136 128 219 180 200 230 240 300 -1.4 -4.0 2.5 Germny 74 359 338 290 325 325 335 400 420 500 6.2 1.8 3.4 Australfa 62 82 910 951 934 940 950 950 1,500 1,800 16.4 28.3 5.2 LNICs 802 1,458 2,644 3,634 3,602 3,544 3,628 3,700 4,297 5,370 5.9 5.2 3.1 Africa 149 195 261 282 314 310 310 310 430 750 3.3 3.3 6.9 Ghana 111 151 128 130 154 155 155 155 170 200 -0.7 0.5 2.0 Americas 54 296 1,079 1,376 1,347 1,360 1,394 1,400 1,950 2,580 19.4 13.3 5.1 Eure 587 806 908 1,582 1 425 1,372 1,322 1,300 1,100 1,080 0.6 -2.8 -2.1 F8 365 488 500 1,200 1,150 1,'00 1,050 1,000 700 500 MA RA -6.2 World 2,800 4,636 1,309 9,709 9,800 9,681 9,972 10,634 12,769 15,590 5.5 5.3 3.6 el Least squares trend for historical periods (1970-91); end-polnt for projected pe.-ods (1992-2005). b/ Eatimte. *ourcesm Eetallgesetchaft, Ketal Statiatics 8 World 8ureau of (letal Statistlcs (actuaL); World ink, Internationet Economics Department (projected). Table AIO: Primary Alumina - Gross Imports My Nain Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ..**..**-------- 1992- Economies 1969-71 1979*81 1990 1991 1992 b/ 1993 1994 1995 2000 2005 1970-91 1960-91 2005 ('000 0o.s).----------------------------------------- (1 p.e.) ** Nigh-Income 2,343 3,725 7,453 7,645 8,045 8,028 6.278 8,974 10,805 12,820 6.2 7.0 3.6 DECD 2,312 3,611 7,098 7,215 7,496 7 438 7,658 6,269 9,705 11,370 5.9 6.7 3.3 United States 417 563 976 1,039 1 172 1,200 1,250 1,350 1,900 2,500 5.3 6.2 6.0 Germany 596 752 1,019 1,007 1,162 1,150 1,150 1,170 1,255 1,300 3.1 4.1 0.9 France 164 316 541 552 518 520 525 560 600 650 5.4 5.1 1.8 Mtherland 45 182 190 183 195 190 200 225 225 250 4.6 -1.1 1.9 Japan 266 929 2,652 2,830 2,532 2,500 2,600 2,830 3,300 3,800 12.6 9.6 3.2 LMICs 380 896 795 807 1,072 1,095 1,202 1,430 1,960 2,770 5.6 2.2 7.6 Asia and Pacific 65 322 583 595 809 832 879 920 1,225 1,675 12.2 5.5 5.8 Europe 224 455 186 166 205 202 255 300 560 805 4.0 0.0 11.1 La World 2,723 4.621 8,243 8,452 9,117 9,123 9,480 10,404 12,765 15,590 6.1 6.2 4.2 a/ Least squares trend for historical periods (1970-91); end-point for projected periods (1992-2005). b/ Estimate. Sources: Metallgesellschaft, Natal Statistics & World Bureau of Netal statistics (actual); Vorld Bank, International Economics Department (projected). Table Al1: Prilmay Aluminum - PdIoU. 1958-93 (Actuel) and 1994-2005 (Prolocied) -------------- 1990 Constant .. -- -Current $ - -- ---G-S MUV el-- -- - 7 CP51 bir -- - Other European Olher European Other European LME d Transactlons & LME rl Tmnsac~ns di LME d Transantions di 1958 490 2.383 3.129 1959 486 2.398 3.109 1960 500 2.415 3.139 1961 470 2.233 2.883 1962 435 2.025 2.595 1963 444 2.107 2.566 1964 493 2.301 2.777 1965 489 2.265 2.669 1966 479 2.143 2,529 1957 484 2.141 2.491 1968 457 2.041 2,288 1969 581 2.462 2.788 1970 540 2.153 2,442 1971 435 1.646 1.843 1972 432 1.499 1.659 1973 863 1.987 2.228 1974 944 2.322 2.864 1975 690 1.527 1,863 1976 862 1.881 2253 1977 991 1.969 2.343 1970 1.045 1.804 2.017 1979 1.603 1.520 2.443 2.317 2.923 2.772 1980 1,775 1.730 2.466 2,404 2.895 2.821 1981 1,263 1.336 1.748 1.849 2.043 2.161 1982 992 1.061 1.394 1.491 1.625 1.738 1983 1,439 1.495 2.070 2.150 2.321 2.411 1984 1251 1.371 1.838 2.015 2.023 2217 1995 1.041 1.112 1.517 1.621 1.650 1,762 1986 1.150 1.261 1.422 1.559 1.510 1.656 1987 1.665 1.608 1.761 1.810 1.820 1.870 1988 2,551 2.545 2.677 2,670 2.755 2.748 1989 1.951 2.040 2.061 2.155 2.117 2213 1990 1.639 1,721 1.639 1.721 1.699 1.721 1991 1.302 1.390 1.274 1.360 1.239 1.323 1992 1254 1.332 1.176 1.249 1.132 1.202 1993 1.140 1,207 1.064 1.126 1.009 1.068 poted 1994 1.225 1.105 1.052 1995 1.300 1.140 1.089 1996 1.400 1.192 1.140 2000 1.825 1.401 1.332 2005 2p60 1.403 13_0 al Defated by G-5 Manufactulna Unit Value (MUV idex. bl Deflated by G-7 Consuner Price Index (CPI). dJ London Metal Exchanoe (LME). unalloed primary Incot. averawo bifasked. as published by the Metls Week. Until November 1988. standard rade. minimum 99.5% at: thereafter. high crade. rrdmum 99.7% al. cash Drice. dV Cerialn other transacions. US shiornents to Europe. Minlmum 99.5%. in -warehouse. EC dutv ald. cJl.f. Europe. This quolon has been published regulady by e Metal Bulletin since December 1975. Source: Metal~geesellschaf AG. Mtal Statistics. Mlh1u~n & MetaL Week (actual): World Bank Internatlonal Economics DePartment (prolected). 133 Table A 12: Bauxite - Prices, a 11975-93 (Actual) and 1994-2005 (Projected) ..................... $tn ---------------------------- (io Current $ ------------- 1990 Constant 5 ----------- G-5 MUV bt G-7 CPI c/ AGuW 1975 22.2 49.1 60.0 1976 25.4 55.4 66.4 1977 30.3 602 71.6 1978 31.3 54.0 60.4 1979 30.7 46.8 56.0 1980 32.0 44.5 52.2 1981 35A 49.0 57.3 1982 40.4 56.8 66.2 1983 37A 53.8 60.3 1984 37.0 54.4 59.8 1985 35.7 52.0 56.6 1986 33.7 41.7 44.3 1987 29.5 33.2 34.3 1988 30.3 31.8 32.8 1989 35.5 37.5 38.5 1990 35.5 35.5 35.5 1991 37.3 36.5 35.5 1992 36.3 34.0 32.5 1993 35.0 32.7 31.0 Plecied 1994 35.0 31.6 30.1 1995 35.0 31.6 30.1 1996 37.5 31.9 30.5 2000 40.5 31.1 29.6 2005 44.0 30.0 28.4 al' IS import price. c.l.f. US ports, bt Ueflated by G-5 Manufacturing Unit Value (MUV) Index. c/ Deflated by G-7 Consumer Price Index (CPI). Source: US Buree-a of Mines, inoLgi Yead2g& Bauxite and Alumina, various issues (actual); World Bank, International Economics Department. (projected). 134 Iron Ore Summary * Weak steel markets in 1992 and 1993 caused world iron ore consumption to decline by more than 8.0% over the two year period. Iron ore consumption is expected to increase over the medium term to the mid-1990s with economic recovery in OECD countries and a slowdown in the rate of decline of steel production in the FSU and Eastern Europe. Additional steel-making capacities will be coming on-stream in Asia, contributing to a modest growth of 1.0% p.a. in world iron ore consumption for the period 1992-2005. * Except for China, all other major iron ore-producing countries posted declines in production in 1992 and operated at reduced rates of capacity utilization. Nevertheless, many capacity expansion programs continued to proceed and about 30 million tons (metal content) net capacity additions are expected by the mid-1990s. Capacity expansions in Brazil and Australia will strengthen their position as the world's number one and two iron ore producers and exporters over the forecast period. China and India will likely also grow to be significant iron ore producers. Iron Ore Prices, a/ 1955-2005 ($/anfe 80 70 £04 a 30 231 Qfmt$ 10art 1990 Sti 190 1985 190 1975 198D 1985 1990 1995 200 2X5 af Bailirisitlirfedfor Eurmn It, f.ab bl by G5M. 135 * The World Bank's indicator price for iron ore fell by 4.9% in 1992 and by I1% in 1993. We forecast that iron ore prices will start to recover in 1995. Over the long term, iron ore prices will follow projected steel prices and increase in constant terms by 0.6% p.a. between 1995 and 2000, and remain largely unchanged between 2000 and 2005. Demand Outlook World iron ore consumption fell in 1992-93. Falling world steel demand in 1992 and 1993 caused world iron ore consumption to decline by more than 8% over the two-year period. The growth of steel production and the growth of iron ore consumption are closely related. Declines in iron ore consumption were registered in nearly all OECD countries due to recession, and in the FSU and Eastern Europe due to the economic and political transformations in those regions. A modest increase in iron ore consumption was seen in the United States in 1993, stimulated by the sizable recovery of its steel industry. Developing countries in Asia and Latin America also posted increases in iron ore consumption in 1992 and 1993. Iron ore is generally separated into two different classifications: non-agglomerated and agglomerated. Non-agglomerated iron ore includes run of mine lumps, fines, concentrates, and pellet-feed. There are two agglomerated iron ore, pellets and sinter. About 60% of the iron ore consumed by the world steel industry is sinter. In Japanese and European steel mills, up to 70% of blast furnace burden is sinter. Sinter is produced by steel mills using non-agglomerated iron ore. However, in the United State and Canada, pellets are used as the main burden in blast furnaces (up to 85% of blast furnace burden). Pellets can be produced by either steel mills or iron ore producers. A second kind of pellet that has been gaining importance recently is the DR-pellet, used in the making of direct reduced iron (DRI) and sometimes referred to as sponge iron. Electric are furnaces (EAFs) gain market share. The only substitute for iron ore is steel scrap which is gaining importance because of wide application of the EAF technology by steel mini-mills. EAF can use up to 100% steel scrap. Mini-mills continue to take market share of higher value-added steel products away from integrated steel makers. Studies have shown that a 1.0% increase in crude steel production by mini-mills reduces iron ore consumption by about 1.5 million tons. In 1992, 28% of world steel was produced by EAFs. Given that much of new steel- making capacity will be EAF, the share of EAF in steel production should continue to increase in the future. Figure 1 shows the world production of steel and iron ore, the implied steel-scrap consumption (i.e., steel-scrap consumption + iron ore production = steel productioi), and world EAF ratio in total steel production. As can be seen, production of steel and iron ore moved in parallel over the period 1961-92, and the implied steel-scrap consumption gradually increased. However, compared to the sharp increase in the EAF ratio from around 16% in 1976 to 28% in 1992, steel-scrap consumption did not grow as fast. 136 Figure 1: World Production of Steel and Iron Ore 800 28 .. ' stee so o % .0 0 26 18 The reduction of iron ore consumption due to substitution of steel-scrap is expected to be moderated because of the development of substitute products made from iron ore such as DRI and hot briquette iron (HBI) that are suitable as feed for EAFs ini place of steel scrap. Other direct steel-making processes such as iron carbide, Corex, and others will also help iron ore compete with steel scrap. The aim of DRI technology is to remove oxygen from the iron oxide contained in the mineral iron ore. DRI is made by passing iron ore through a reducing chamber to yield a final product of 90% Fe or more. This process is very energy intensive and is found only in countries rich in natural gas resources. Production costs for DRI is $75/fton, if the energy price is low. This translates to about $1 15/ton c.i.f. at steel mills, which compares with a scrap price of $150/ton c.i.f. No demand growth for high-income countries. For the OECD countries as a whole, consumption of iron ore fell by 4.5% in 1992 and by 5.3% in 1993. Most of the declines in 1992 took place in the United States, Germany, and Japan. Germany and France also registered large declines in 1993. These four countries account for about 70% of the total OECD iron ore consumption. In line with the forecasts of steel production for the OECD countries, iron ore consumption is projected to recover through the mid- 1990s and then remain flat over the long term. Iron consumption for this group over the period 1992-2005 is projected to decline by 0.4% p.a., compared with zero growth projected for steel production. The difference reflects the expectation of improved efficiency in steel-making and modest substitution of steel scrap for iron ore. Healthy growth for the LwlCs. Iron ore consumption in the LMICs fell by 3.2% in 1992, because of a 22.4% decline in the FSU and Eastern Europe. Strong growth continued in Asia and Latin America. Some countries posted extraordinary gains in iron ore consumption in 137 1992, e.g., Brazil by 10.1%, China by 14.5%, and the Republic of Korea by 9.4%. Iron ore consumption for the LMICs is expected to follow closely the projected levels of steel production. Iron ore consumption is expected to grow modestly over the medium term once the decline in steel production in the FSU and Eastern Europe comes to a halt. Healthy growth is expected for the long term (2000), partly because of new steel-making capacity that will come on-stream in Asia. The projected growth rate from 1992-2005 for this group of countries is 1.9% p.a., equivalent to the expected growth rate of its steel production. Combining the forecasts for high- income countries and the LMICs, total world consumption of iron ore is projected to increase by 1.0% p.a. from 1992-2005, similar to the forecast growth of world steel production. Supply Outlook World iron ore production fell by 6.1% in 1992. Nearly all major iron ore producers (Australia, Brazil, Canada, China, FSU, India, and the United States) registered declines, ranging from 1.1% (United States) to 20.5% (FSU). Only China posted a 11.1% increase. World iron ore production will decrease by 3.9% in 1993, due to continued sluggishness in the world steel market, particularly in OECD countries. During 1992-93, almost all export- oriented iron ore producers operated well below normal capacity utilization rate. However, many capacity expansion programs continued to proceed because of earlier investment decisions. Capacity to increase in the long term. In 1992, worldwide iron ore capacity utilization rate was around 80%. Investment in capacity expansion is proceeding in Australia, Brazil, China, India, Mauritania, Sweden, and Venezuela, while reductions in capacity are expected for Canada, France, the FSU, and Liberia. Some important iron ore deposits are near exhaustion and replacements will be needed. However, given the current status of iron ore development projects worldwide, surplus capacity will be a problem in the longer term. Table 1 presents data on new mines and capacity expansion programs of major iron ore-exporting countries. There are about 40 million tons (metal content) of capacity additions expected by mid- 1990s. Table 2 lists information on iron ore mine closures and capacity reductions. It appears that about 10 million tons (metal content) of capacity will be closed before 1994. Unlike Japan and Germany whose steel industries rely 100% on imported iron ore, the US steel industry obtains its iron ore domestically and from neighboring Canada. In the United States, four companies with seven mines account for about 90% of total US iron ore production. The market structure has been quite stable, although high-cost mines are facing financial difficulties. In Canada, iron ore output dropped by 7.4% in 1992. Canada's pellet production has been stable but production of iron ore concentrate declined significantly because of the contraction in Japanese and European steel markets. 138 Table 1: New Iron Ore Mines and Capacity Expansion Plans, 1993-98 Annual Capacity (Million Investment Country Producer Location tons gross) Product Type ($ million) Start Date Mauritania SNIM M'haoudate 6 Ore 170 1994 El Aouj II Ore El Aouj 5 Pellets 750 1995 Guinea MIFERGUI Nimba Mts 6-9 Ore 220 Senegal MIFERSO Faleme 6-10 Ore 620 China Qidashan 8 Ore 1995 Shuichang 9 Ore India NMDC Bailadila 5 Ore 1994/95 Bailadila 8 Ore 1997/98 Kudremukh Iron Mangalore 3 Pellets 1990s Iran CIIOC Bafgh 3 Concentrates 450 Nisco Gol e Gohan 2.7 250 Chador Malu 5 600 Venezuela CVG Ferrominera Porto Ordaz 7-22 Ore 170 1993/96 Porto Ordaz 8 Concentrates 400 1996 Porto Ordaz 3.3 Pellets 20 1994 Chile CMP - Romeral Los Colarodos I Pellet feed 1994 Los Colarodos 180 1995/98 Brazil MBR Pico 3.5 Ore 274 1994 Sarnarco Minas Gerais 1.5 Pellet feed 50 1994 Samitri Minas Gerais 2.5 Ore 50 1993 Australia Robe River Mesa 8 Ore 80 1993 BHP Yandi 10 Ore 85 1993 BHP Yarrie, Pilbara 5-6 Ore 40 1994 Hamersley Channar, 5 Ore ? 1998 Pilbara Hamersley Brockman, 4 Ore 50 1992 Pilbara Hamersley Marando, 10-12 Ore 500 1995 Pilbara Portman Kaolyanobbing 1.5 Ore 15 1993 Sweden LKAB Kiruna 2 Ore 315 1996 Kiruna 4 Pellets 285 1995 Source: UNCTAD, Review of the Current Situation and Otlook for Iron Ore - 1993. 139 Table 2: Iron Ore Mine Closures and Capacity Reductions, 1991-94 Reduction of Capacity Effective or Country Producer Location (Million tons gross) Planned Date Remarks Liberia LIMINCO Yekepa From 2 to 0 1992/93 Temporary Bong Mining Yekepa From 6 to 0 1991 Permanent Canada Algona Ontario 1.1 1993 Permanent Wabush Mines Labrador From 6 to 4.5 1992 Temporary us Eveleth Mines Minnesota From 5 to 3 1993 Temporary Mexico Las Encinas Colima 1.2 1994 Permanent France Usinor. Lovmines Lorraine 3 1994 Permanent Sweden SSAB Dannemora 0.6 1992 Permanent Australia BHP Koland Island 4 1993 Permanent Source: UNCTAD, Review of the Current Situation and Outlook for Iron Ore - 1993. Australian production has declined, but capacity expansion will go ahead. In Australia, iron ore production decreased by 5.9% in 1992. As the largest supplier to the Japanese market, Australian iron ore producers were forced to reduce production because of the decline in Japanese demand. Despite the downturn, the Australian iron ore industry continued with its development plans to increase production capacity to 140 million tons by 1995. Hamersley remained the largest producer in Australia although its shipments dropped by 8.0% in 1992. Capacity is expected to increase in the second half of 1990s from the Channar joint venture with China and the Marandoo project. BHP, the second largest producer in Australia, maintained production by increasing exports to other Asian countries. The third largest producer, Robe River, saw its production fall by 12.8% in 1992, but its capacity expansion program will result in 32 million tons of total production capacity later in this decade. Sweden is the only West European country with expansion plans. Only 8.6 million tons of iron ore were produced in EU countries in 1992, representing a 25% decline from 1991. In France, domestic iron ore no longer meets the quality requirements of French steel makers. As a result, one of the Lorraine iron ore mines was closed in 1992 and the other two will be closed in 1994. Sweden remains the main iron ore-producing country in Western Europe with only one producer, LKAB, in operation. LKAB has committed to a large investment program to expand its Kiruna mine output and to build a new pelletizing plant. 140 Production has declined in Africa. In Mauritania, SNIM's production declined by 20% to 8 million tons in 1992. Its M'Haoudat project is expected to reach 6 million tons of annual capacity and will replace depleting production from Kedia mine. During the 3 years of civil war, Liberian annual iron ore production dropped from 12 million tons to less than 2 million tons in 1992. Mining activities were completely halted in October 1992 and it seems unlikely that the situation will return to normal soon. The government of Guinea continued to promote the MIFERGUI project on the Guinea/Liberia border, because of its favorable technical and economic characteristics. However, the long-lasting civil war in Liberia and the likely negative environmental impact of the mine has hampered the realization of the project. In South Africa, 28 million tons of iron ore were mined in 1992, representing a decrease of 1.9% from 1991. Iscor, a major South African steel producer, has two iron ore mines to meet its own demand and also to export about 15 million tons to the world markets. South American countries plan to increase production capacity. In Brazil, iron ore production fell to less than 95 million tons in 1992, the lowest level since 1988. Nevertheless, Cia Vale do Rio Doce (CVRD) remained the world's largest iron ore supplier. Investments have been made by CVRD to maintain capacity in Itabira at around 50-55 million tpy and in Carajas at 33 million tpy. CVRD has tried to diversify its business into downstream metal industries to protect itself from current low iron ore prices. At present, iron ore accounts for 70% of CVRD's revenue. The second largest Brazilian iron ore producer, Mineracoes Brasileiras Reunidas (MBR), continued its expansion program to increase capacity to 27 million tpy by 1994. In Venezuela, CVG Ferrominera plans to increase its production to 32 million tons and construct a new pellet plant in order to enhance its position as the world's largest supplier of higher-value- added DRI. In Chile, Compania Minera del Pacifico (CMP) is undertaking an intensive exploration program for new deposits. China is a major importer of iron ore to support its steel industry. In China, the domestic iron ore industry is operating at full capacity driven by the rapidly expanding steel industry. In 1992, China produced 196 million tons of crude ore, but because of the low grade (30-35% Fe) of its iron ore, separation and concentration are costly. From 200 million tons of crude ore, only about 95 million tons are usable after processing. Current expansion plans are to double production in the Shuichang mine from 9 to 18 million tpy, and increase capacity in the Qidashan mine from 7 to 15 million tpy by 1995. Nevertheless, domestically produced ore in China cannot meet demand from the steel industry. As a result, iron ore imports and overseas investments in captive mines have been growing. China invested in the Channar joint-venture project with Hamersley in Australia in 1990 which has an expected annual production of 5-10 million tons. All production from Channar will be shipped to China. Another investment is the acquisition of Hierro Peru in which output of 5-10 million tons is expected in 1995. The joint venture with Portman Mining to develop the Koolyanobbing iron ore mine in Australia will produce about 2.6 million tpy. The fourth Chinese overseas investment for iron ore is a joint venture with Brazil's CVRD to develop a new mine at Carajas. China's iron ore imports from CVRD will increase from 3.8 million tons to 6 million tpy upon the formation of the joint venture. 141 Asian countries ready to increase capacity. Indian iron ore output declined by 3.6% in 1992, but the outlook is favorable because of growing local steel production. India plans to expand the Bailadila capacity from 9 to 13 million tons by 1995 and to 22 million tons by 1998. Among other Asian countries, Mongolia, Iran, and Democratic People's Republic of Korea are likely to increase their iron ore production. Eastern Europe and the FSU show sharp declines. Iron ore production in Eastern Europe fell by 20.5% in 1992, following a 17.7% decline in 1991. Iron ore output in the FSU dropped to 162 million tons in 1992 compared with 248 million tons in 1988. The Russian Federation, Ukraine and Kazakhstan are three main iron ore-producing regions in the FSU. Iron ore production costs are high in the FSU because (i) about 80% of FSU iron ore output is low grade and has to be concentrated; (ii) nearly 15% of mines are underground which adds to the cost; and (iii) the majority of mines are old and have low productivity. Iron ore mining in East European countries remained depressed in 1992. In the Czech Republic and Slovakia, annual production dropped from 1.7 million tons in the late 1980s to 700,000 tons in 1992. In Bulgaria, only 350,000 tons were produced, which was 500,000 tons less than in 1991. Technological and Environmental Issues. Despite abundant availability of iron ore worldwide, the issue of iron ore quality is becoming more important because of growing competition from steel scrap and environmental efforts to reduce harmful wastes and emissions from the steel-making process. Some of the best deposits are being gradually depleted including Australia's Brockman, Brazil's Itabira, and Mauritania's Kedia. As a result, more research and development is needed to make inferior ore production economic. Recent gains from the mini-mill technology have generated greater demand for high-quality virgin iron unit. The search for cleaner inputs into steel mills favors the gas-based direct reduction method. In 1992, world production of DRI reached a new record of 21 million tons, about 8% higher than in 1991. About 3.5 million tons of DRI were sold to international markets, mainly from Venezuela and Malaysia. DRI prices have been quite competitive against No. I steel scrap. World DRI output almost tripled from 1982 to 1992, although its current share of world demand for ferrous metallics (e.g., iron ore, steel scraps and DRI) is still less than 2.0%. At present, DRI plants are being built in India, Indonesia, Iran, Libya, and Malaysia. Australia and Thailand are also considering building DRI plants. World DRI production is forecast at 28 million tons in 1995 and 35 million tons by 2000. Direct steel-making technologies have been developed in the iron ore and steel industries to combat environmental pollution by eliminating the coke-making step required in conventional blast-furnaces. Among those, the COREX, iron carbide and Fastmet processes showed the best potential. The COREX process mixes raw coal and iron ore to produce molten iron. This process costs 20% less per ton of hot metal and uses 15% less energy than the regular black-furnace process. The iron carbide process is gas-based and it heats iron ore concentrate in a fluidized bed to produce molten iron. This process is clean because water is the only by- product. The Fastmet process mixes iron ore concentrate with pulverized coal plus a binder and 142 fires the product on a very thin bed. The burning coal reduces iron oxides to metallic iron very quickly (in minutes). These new processes are said to be more environmentally friendly and cost effective because they use coal, iron ore lines, and concentrates, and do not need to go through the coke-oven, sintering, and pelletizing stages. In addition, these new processes can make the best use of low-grade fine ores that are widely available around the world. The drawbacks of these new processes at present are that the technologies are not fully developed and production scales are still relatively small. Modest recovery in production is expected. World iron ore production is expected to recover modestly, by 1.4% in 1994 and by 2.1% in 1995. The recovery will be stimulated by increased demand from OECD countries and the LMICs in Latin America and Asia. Production declines in the FSU and East European countries are expected to slow in the next few years and begin to grow again towards the end of the 1990s. Capacity expansions in Brazil and Australia will strengthen their positions as the world's number one and two iron ore producers over the forecast period. Production in China and India is expected to record strong growth, making them among the most significant iron ore producers in the world. Over the period 1992-2005, iron ore production in high-income countries is projected to increase by 0.2% p.a., mainly due to strong growth in Australia. Iron ore production in the LMICs is expected to increase by 1.1 % p.a. over the same period. Trade Outlook Declines in trade reflect the poor health of the world economy. About 40% of the world iron ore demand is met by imports, 65% of which goes to Westrn Europe and Japan. Iron ore ranks second in terms of tonnage and ton-miles only to crude oil in the world seaborne trade. Nearly all major iron ore exporters saw their exports plunge in 1992. Venezuela, Chile, and Mauritania suffered large reductions, while Sweden and the FSU managed to keep their export levels unchanged. Despite declines in export tonnage for Brazil (-7.8%) and Australia (- 8.1%), both countries maintained dominating shares of the world export market, at nearly 30% each. Table 3 shows the shares of major iron ore exporters and importers for 1991 and 1992. Total world exports decreased by an estimated 4.7% in 1993 with continued declines from all major exporting countries. On the import side, in 1992, the strong growth in China (30%) and the Republic of Korea (8.6%) was not enough to compensate for the sharp fall in Japan (-9.7%) and the EU (- 7%). Iron ore imports in China grew more than seven-fold from 3.5 million tons in 1982 to 25 million tons in 1992, and is now the fourth largest importer in the world with 7% of total imports. Around 20% of steel production in China uses importcO iron ore. More than half of its iron ore imports are from Australia, with 20% from Brazil and 10% from India. China is actively involved in the development of foreign captive mines in order to secure future importing needs. Among high-income countries, imports of iron ore to Japan fell sharply in 1992 because of weak steel production. Iron ore imports also declined in all EU member countries in 1992. 143 Table 3: Major Iron Ore Exporters and Importers (% of world exports or imports) Major Exporters 1991 1992 Major importers 1991 1992 1. Brazil 28.8 29.0 1. Japan 32.2 30.5 2. Australia 28.0 28.1 2. Germany 11.0 11.1 3. India 7.8 7.6 3. Korea, Rep. of 7.2 8.5 4. FSU 6.9 7.4 4. China 4.7 6.7 5. Canada 7.5 6.8 5. Belgiurn/Lux. 4.9 4.8 6. Sweden 3.9 4.2 6. France 4.6 4.6 7. South Africa 3.9 4.1 7. United Kingdom 4.7 4.2 8. Venezuela 3.4 2.8 8. Italy 4.5 4.0 9. Mauritania 2.5 2.2 9. United States 3.4 3.3 10. Chile 1.9 1.6 10. Czechoslovakia 3.0 3.1 Total 94.6 93.8 Total 80.2 80.B Source: UNCTAD Secretariat. Despite the recent slump, Japan and the EU remained the two largest markets for iron ore. Table 4 shows major suDpliers of iron ore to Japanese and EU markets. In the Japanese market, the top three countries (Australia, Brazil, and India) supply 84% of its total imports, with Australia's share of imports at 46% and Brazil's share at 24%. In the EU market, Brazil, Australia, and Canada account for 68% of EU imports, with Brazil accounting for 39% and Australia for 17%. Other exporters to the EU market which have significant shares are Sweden and Mauritania. Long-term contracts are a significant feature of the international iron ore market. Contracts typically extend for 10-15 years covering most of the international iron ore trade. For example, Japan's long-terms contracts for the 1990s total in the range of 112-142 million tons, in which Australia has 47-67 million tons, Brazil 32-37 million tons, and India 20-22 million tons. During a downturn in the steel market, because long-term contracts are rather inflexible, iron ore stocks tend to run high both in importing and exporting countries. Despite these difficulties, steel producers worldwide have strong incentives to secure long-term supplies of iron ore. Geographical proximity is an important determinant of iron ore trade patterns because of the relatively high shipping cost of iron ore. Table 5 shows freight rates for iron ore on well-traveled shipping routes. Given that the f.o.b. price for Brazil's Itabira iron ore in 1992 was $31.6/ton (metal content), which translates to $20.3/ton (gross weight), the freight rate of $4.5/DWCT between Brazil and Europe is equal to 22% of the f.o.b. price, and the $8/DWCT rate between Brazil and Japan is equal to 39% of the f.o.b. price. Such high transportation costs make exporters less competitive in faraway markets. However, because of an existing "freight sharing" system between Japanese steel mills and the Brazilian iron ore suppliers, where the 144 Table 4: Major Suppliers of Iron Ore to Japanese And EU Markets, 1992 Japan (%) EU (%) 1. Australia 45.8 1. Brazil 38.5 2. Brazil 23.5 2. Australia 17.0 3. India 14.6 3. C nada 12.8 4. South Africa 4.3 4. Sweden 9.0 5. Chile 3.5 5. Mauritania 5.7 6. Philippines 3.4 6. Venezuela 4.3 7. Venezuela 1.5 7. South Africa 3.5 8. Canada 1.1 8. Liberia 1.3 Others 2.3 9. Norway 1.2 Others 6.7 Total 100.0 Total 100.0 Source: EUROSTAT and UNCTAD Secretariat. differences in freight costs for shipments between Brazil-Japan and Brazil-Europe are shared by both Brazil and Japan, Brazil is able to maintain high shares in both the EU and Japanese markets. In contrast, Australia's share in the EU market is much smaller than in the Japanese market. Asia is expected to show the largest growth in imports. The existing structure of the world iron ore trade will generally continue with high-income countries being net importers, and the LMICs as net exporters. Imports of iron ore by high-income countries are forecast to be almost constant over the forecast period, while strong growth in import demand is expected in the LMICs, particularly in Asia. Imports by the FSU and Eastern Europe should decline over the forecast period. Brazil and Australia will continue to be the two largest iron ore exporters. Table 5: Freight Rates for Iron Ore ($/DWCT ad) Trade Route 1983 1989 1990 1991 1992 Eastern Canada - Europe 3.3 7.1 5.6 6.1 4.0 Liberia - Europe 4.2 6.9 6.5 6.9 4.7 Brazil - Europe 5.1 7.5 6.7 7.5 4.5 Brazil - Japan 8.2 13.7 12.6 2.9 8.0 Western Australia - Europe 7.6 9.6 9.4 10.3 7.1 a/ Dead Weight Cargo Ton. Source: Drewry Shipping Consultant Ltd. 145 Price Prospects Prices are closely correlated throughout the world. Long-term contracts between iron ore suppliers and consumers commonly fix only quantities and leave prices open for annual re-negotiation. Negotiations in Europe are usually held in November and December to set prices for the next calendar year; in Japan they are held in January or February for the fiscal year which runs from April to March. Price negotiations are a tedious process because iron ore is not a homogeneous commodity in terms of size, quality, impurities, etc. However, the first price agreement reached between a large supplier and an importer usually serves as the reference for subsequent negotiations. In the European market, the traditional reference price is the c&f Rotterdam quotation for Brazil's CVRD fines negotiated between Brazil's CVRD and German steel mills. Once the benchmark price is known, other price negotiations become much easier. In the Japanese market, the market reference is usually the f.o.b. price between Australia's Hamersley or BHP wita major Japanese integrated steel makers. Once the reference price is set, the same percentage change in the reference will be applied to all brands of iron ore. The correlation between reference prices in European and Japanese markets has been high, particularly in past seven to eight years. There has been virtually no difference in f.o.b. prices for iron ore from Australia's Hamersley in the Japanese market and from CVRD in the European market. Table 6 shows changes in iron ore price setting contracts both in Japan and Europe since 1981. By the end of 1991, the first price settlement for 1992 was made between Australia's Hamersely and Japan's integrated steel makers resulting in declines of 4.9% for fines and 6.5% for lumps. On the same day, settlement was reached for the reference price between CVRD and German steel makers for the same 4.9% decrease for fines. As market conditions continued to Table 6: Iron Ore Market Price Setting Process Japanese Market European Market Date Setter Change (%) Date Setter Change (%) 1981 02/26181 CVRD 7.50 02/15/81 Venezuela/Belgium 6.10 1982 03/26182 Newman 17.20 02/05/82 CVRD/Germany 15.70 1983 03/28(83 CVRD -11.40 03/08/83 Carol/Germany -11.20 1984 01/20(84 CVRD -11.60 12/07/83 QCM/Germany -8.50 1985 01/31/85 MMTC 0.00 12/07/84 QCM.Carol/Germany 0.00 1986 02/14/86 MMTC -1.88 12/03/85 QCM.Carol/Germany -1.10 1987 02120(87 Newman -5.00 03/05/87 QCM/Holland -9.30 1988 12/22/87 Hamersley -4.00 12/24/87 Hamersley/Britain 8.60 1989 12114/88 Hamersley 13.00 12/19/88 CVRD/Germany 13.00 1990 01/24/90 Hamersley 15.96 01/27/90 CVRD/Germany 15.96 1991 01/30/91 Hamersley 7.90 01/31/91 CVRD/Germany 7.90 1992 12/17/91 Hamersley -4.90 12/17/91 CVRD/Germany -4.90 1993 01/13/93 Ham/BHPICVRD -11.00 12/22/92 SNIM/France -13.47 Source: The TEX Report, July 1. 1993. 146 worsen in 1992, the first price settlement for 1993 in Europe between SNIM of Mauritania and Sollac of the Usinor group in France resulted in a 13.47% drop in the price for Mauritania's ore and served as the benchmark price for 1993. After adjusting for differentials in freight rates and quality, CVRD's prices in the European market were lowered by 11% for fines and 10% for pellets. Price reductions of similar magnitude were reached later in the Japanese market. In nominal dollars, iron ore prices in 1993 were at the same level as in 1981; in constant terms, prices declined by about a third over this period. Steel and steel scrap prices show the way for iron ore. The CVRD's f.o.b. price of standard sinter feed in the European market (64.5% purity ores from Itabira and other mines in the southern system) is used as the World Bank's indicator price for iron ore. Thus, iron ore price forecasts are largely derived from our steel price forecasts. Figure 2 compares the World Bank indicator price for iron ore with prices of steel and steel scrap (US No. I heavy melting) since 1969. It is apparent that the prices of steel and steel scrap move closely together with the scrap price fluctuating more than the steel price. The movement of the iron ore price, however, lags one or two years behind the other two prices. At the time of writing, the 1994 price negotiations are under way both in Japan and Europe. Although steel prices increased on average by 3% in 1993, steel makers in Japan and Europe are demanding for "a substantial price reduction" on account of their financial difficulties. Iron ore suppliers from Brazil, Sweden and Australia have argued that since the world iron ore market is expected to firm up, it "does not necessitate a price Figure 2: Price Indices of Iron Ore, Steel and Steel Scrap (in constant terms) 260 200 ~18D 100 s0 - 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 - - -- steel - - - Sleel Scrp - Irn Ore 147 reduction". Wt forecast that iron ore prices for 1994 will decline by 5.0% in current terms compared to 1993. For 1995, the favorable outlook for the steel market by the mid-1990s warrants an increase in iron ore prices (1.7% in constant terms). Over the long term, iron ore prices are expected to follow projected steel prices and increase in constant terms by 0.6% p.a. between 1995 and 2000, and decline slightly by 0.1% p.a. between 2000-2005. The same set of factors affecting the international steel market will inevitably influence the iron ore market. The historical volatility of iron ore prices is estimated to be 9.25% over the period 1980 to 1993. If the worse case scenario prevails in the international steel market, iron ore prices for 1994 are expected to decline by 9% in current terms from the 1993 level. If the international steel market does not show the expected recovery for rest of the 1990s, iron ore prices in 2000 will be 25% lower than our baseline forecast. However, if the best case prevails, iron ore prices are expected to be 13% higher than the baseline forecast in 1995 and 25% higher in 2000. 148 Table Al: Iron Ore (Metal Contents) - Production By Main Countries and Economic Regions Actual Projected Growth Rates af --------------------------------- -------------------------------------------- --------------------------- cotmties/Averages Countries/ -------- m Economies 1969-TI 1979-81 1990 1991 1992 b/ 1993 1994 19 2000 2005 1970-91 1990-91 2005 ------ ------------------------------------------- 00Tn)-------------------------------- -------- pa)--------- High-Income 165,002 173,991 149,442 154,395 146,658 143,290 144,054 145,091 14,752 149,936 -1.4 0.1 0.2 OECD 164,909 173,974 149,442 154,395 146,658 143,290 44,054 145,091 144,752 149,936 -1.4 0.1 0.2 United States 52.052 48,769 35,650 35,085 34,705 33,522 33,767 34,019 32,593 31,870 -3.0 -0.2 -0.7 Canada 26,396 33,211 22,808 23,491 21,806 21,207 21,114 21,026 20,113 19,899 -1.2 -1.6 -0.7 France 17,523 8,339 2,650 2,255 1,63 1,628 1,632 1,636 1,383 1,199 -10.2 -10.4 -2.4 Sweden 20,700 16,296 12,901 12,641 12,703 12,516 12,683 12,853 13,230 13,999 -3.1 0.2 0.7 Australia 32,417 55,489 70,560 75,640 71,300 71,679 73,236 75,047 82,538 92,274 2.2 2.9 2.0 LHICs 248,667 347,653 408,389 384,437 360,299 344,045 348,940 358,137 384,818 416,081 1.9 2.2 1.1 Africa 34,762 35,801 30,286 27,122 25,252 25,437 25,672 26,174 26,7B0 28,650 -1. -1.0 1.0 South Africa 5,686 17,770 19,689 18,819 18,460 18,671 18,877 19,287 19,562 20,915 5.7 1.7 1.0 Mauritania 5,640 5,9 7,009 6,626 4,945 4,917 4,938 5,000 5,253 5,631 0.4 2.8 1.0 wa Americas 49,784 87,208 124,930 124,043 118,313 120,522 124,132 128,083 137,842 149,849 3.7 4.8 1.8 Brazil. 21,864 62,627 98,997 97,927 94,783 96,359 99,332 102,463 115,310 130,347 6.1 5.8 2.5 Asia and Pacific 50,757 81,533 98,979 102,455 108,664 111,359 114,496 118,360 132,692 147,793 2.8 3.8 2.4 China, People's Rep. 23,400 51,417 59,378 61,354 68,578 70,002 71,314 73,352 80,179 87,512 3.7 4.2 1.9 India 19,686 25.619 34,369 35,837 34,569 35,634 37,126 381,668 44,941 51,466 2.4 3.5 3.1 Europe 110,549 140,248 148,232 124,213 101,169 86,727 84,640 85,521 87,504 89,789 1.0 0. -0.9 World 413,670 521,643 557,831 538,832 506,957 487,335 492,994 503,228 529,571 566,016 0.8 1.6 0.8 ....................................................................................................... of Leant sare1 trend for historical periods (1970-91); end-point for projected periods (1992-2005). b/ Estimate. Sources: UNCTAD (actuat); World lank, international Economics DepartTent (projected). Table A2: Iran Ore (Metal Contents) - Apparent Comnption By Main Countries and Economic Regions Actual Projected Growth Rates */ Averages Countries/ Econamies 1969-71 1979-81 19 1 1992 bI 1993 1994 1995 2000 2005 17-91 1980-91 2005 ------------------------------------------------(000 TosS)-------------------------------- ---------cx p.a.) ------- High-Income 247,413 258,280 231,630 221,423 211,835 201,079 202,126 207,052 198,42 202,088 1.4 0.3 -0.4 OECD 245,660 253,873 226,094 215,672 206,194 195,653 196,462 201,297 191,595 196,164 -1.5 -0.5 -0.6 United States 75,231 63,328 45,019 40,927 40,461 41,675 42,699 45,565 44,320 42,477 -4.1 -0.7 0.4 Germany 30,418 33,059 27,005 25,121 24,634 22,415 20,846 20,429 21,450 23,060 -2.0 -4.0 -0.5 France 17,080 16,404 13089 12,368 11,355 1,617 9,895 9,929 10,413 10,507 -2.2 -1.4 -0.6 United Kingdom 14,716 8,849 9,126 8,407 7,206 7,350 7,326 7,931 7,306 6,857 -2.1 4.0 -O. Italy 6,879 9,784 9,978 10,356 10,300 10,506 10,525 10,623 10,207 11,017 1.3 0.7 0.5 Japan 62,204 77,850 75,286 76,420 69,247 71,324 71,323 72,374 70,130 70,565 -0.1 -0.1 0.1 LMICs 163,768 254,933 312,193 295,294 285,996 286,256 290,867 296,175 331,129 363,929 2.7 2.5 1.9 Americas 9,200 22,163 39,966 36,615 38,698 40,324 41,77 43,263 44,988 46,228 6.0 6.7 1.4 BraziL 4,056 11,765 26,705 23,385 25,860 27,095 27,526 27,509 28,952 30,917 7.7 9.7 1.4 Asia and Pacific 35,842 75,893 101,954 112,219 126,763 136,806 142,016 146,029 172,810 200,646 4.7 5.3 3.5 China, People's Rep. 23,400 54,224 68,414 73,042 84,45 91,759 95,452 98,982 116,138 134,227 4.6 5.4 3.6 Korea, Rep. of (3) 5,723 13,69 17,238 18,930 21,593 21,973 22,182 25,507 28,783 9.9 3.2 India 8,260 11,484 14,341 16,077 16,880 16,771 17,312 17,855 19,57h 22,053 2.3 2.9 21 Europe 110,186 148,263 154,172 129,005 103,127 88,174 56,684 87,859 92,617 95,682 1.1 -0.2 -0.6 World 411,1831 513,213 543,823 516,717 497,531 487,335 492,994 503,228 529,571 566,016 0.6 1.2 1.0 a/ Least sqares trend for histricaL periods (1970-91); end-point for projected period. (1992-2005). bi Estmate. Sources: UNCTAD (actual); Vorld lank, International Economics Department (projected). Table A3 Iron Ore (Netal Contents) - Gross Exports By Main Countries and Economic Regions ActuaL Projected Growth Rates of Averages countrfes/ ..---.---------- 1992- Economies 1969-71 1979-81 1990 1991 1992 b/ 1993 1994 1995 2000 2005 1970-91 1980-91 2005 --0-------------------------------------------(0 Tons) (---------------------------------. p.a.) -------- High-Income 77,291 99,814 94,130 104,608 97,106 91,923 92,072 93,133 96,750 103,541 0.3 1.1 0.5 DECD 77,291 99,814 94,130 104,608 97,106 91,923 92,072 93,133 96,750 103,541 0.3 1.1 0.5 Canada 22,738 26,812 17,101 18,769 15,908 14,592 14,590 14,400 13,212 12,510 -1.5 -1.6 -1.8 France 5,750 2,609 1,033 993 905 863 858 859 723 623 -9.8 -7.6 -2.9 Sweden 17,521 13,423 10,679 10,094 10,184 9,610 9,277 9,019 7,569 7,012 -2.9 0.2 -2.9 AustraLia 25,710 48,925 60,578 69,104 63,742 61,701 62,536 64,053 70,467 78,645 2.7 3.0 1.6 LMICs 105,525 137,017 153,721 146,014 133,739 128,423 129,523 132,417 137,636 147,051 1.4 1.9 0.7 Africa 27,135 29,133 21,057 17,201 15,704 15,227 15,236 15,511 15,804 16,799 -1.8 -2.8 0.5 South Africa 1,923 10,283 11,069 10,035 9,664 9,408 9,431 9,621 9,718 10,324 8.0 1.1 0.5 F- Mauritania 5,519 5,824 7,381 6,496 5,187 4,917 4,938 5,000 5,253 5,631 0.5 2.6 0.6 U1 Americas 41,383 66,678 87,303 89,365 81,534 79,947 81,638 84,111 90,142 97,368 3.1 4.0 1.4 BraziL 17,807 50,861 72,292 74,542 68,923 67,446 68,933 71,000 79,569 89,370 5.9 4.6 2.0 Asia and Pacific 12,458 16,691 23,279 22,832 20,198 19,979 20,536 21,256 24,212 27,206 2.8 3.8 2.3 India 11,406 14,135 20,028 19,760 17,689 17,551 18,130 18,855 21,822 24,831 2.4 3.9 2.6 Europe 20,163 24,361 22,038 16,571 16,292 13,270 12,114 11,539 7,478 5,678 -0.2 -1.5 -8.1 World 182816 236831 247851 250622 230845 220,346 221,596 225,550 234,387 250,592 0.9 1.6 0.6 a/ Least squares trend for historical periods (1970-91); end-point for projected periods (1992-2005). b/ Estimate. Sources: UNCTAD (actuaL); World Bank, International Economics Department (projected). Table A4: Iron Ore (Metal Contents) - Gross Imports By Main Countries and Economic Regions Actual Projected Grouth Rates al Averages Countries/ .--..***.**..-* 1992- Economies 1969-71 1979-81 1990 991 1992 b/ 1993 1994 1995 2000 2005 1970-91 1950-91 2005 *.*....**..*.* (000 Tons) -................................ T)----------*-----------------*----* (% p.a.) -*------ High-Income 159,701 184,103 176,318 171,636 162,257 157,864 157,035 159,314 157,212 160,619 -0.5 0.2 -0.1 OECD 159,636 181,833 169,152 165 885 156,616 151,966 151 153 153.341 151,311 154,599 -0.7 0.0 *0.1 United states 25,929 18,008 11,373 8,398 8,950 9,663 10,012 10,665 10,414 10,055 -6.0 -2.4 0.9 Germany 28,218 32,497 26,994 25,116 24,629 22.410 20,841 20,424 21,445 23,055 -1.7 -3.8 -0.5 France 5,306 10,675 11,472 11 106 10 617 10,406 9 807 9 823 10,342 10,513 2.6 1.? -0.1 United Kingdom 11,492 8,338 9,114 8,395 7,200 7,698 7,760 8,386 7,754 7,332 -1.0 4.3 0.1 Italy 6,534 9,721 9,978 10 356 10 300 11 013 11 157 11,241 10 842 11,789 1.5 0.8 1.0 Japan 61,283 77,572 75,174 76,312 69,225 74,740 75,581 76,561 74,470 75,487 0.0 -0.1 0.7 LMICs 20,626 44,297 57,525 56,871 59,402 62,482 64,560 66,236 77,175 89,973 4.9 3.1 3.2 Americas 800 1,633 2,339 1,937 1,860 2,032 2,129 2,200 2,297 2,378 5.5 5.4 1.9 L" Asia and Pacific 23 10,265 26,254 32 596 38,297 43,464 45,976 47,777 59,573 72,749 36.8 12.3 4.9 China, People's Rep. 2,807 9,036 11,688 15,837 18,185 19,531 20,859 27,762 35,887 19.9 6.3 Korea, Rep, of 23 5,466 13,500 17,064 18,600 22,239 22,886 23,063 26,621 30,263 33.5 10.3 3.7 Europe 19,799 32,376 27,978 21,363 18,250 16,465 15,987 15,680 14,193 13,191 0.9 -2.6 -2.5 World 180327 228401 233843 228507 221659 220,346 221,596 225,550 234,387 250,592 0.5 0.9 0.9 a, Least squares trend for historical periods (1970-91); end-point for projected periods (1992-2005). b/ Estimate. Sources: UNCTAD (actual); World Bank, International Economics Department (projected). Table A5: Iron Or - Pdces. a/ 1958-3 (Actul and 1994-2005 (Proleted) -ltofn le b0- Current- 1990 Contant$ ------ G-5 MUV v/ G-7 CPI d/ 1958 14.4 69.9 91.8 1959 12.2 60.3 782 1960 11.4 55.2 71.7 1961 11.0 52A 67.6 1062 11.0 51.3 65.7 1963 11.0 52.3 63.7 1064 11.0 51.4 62.0 1965 10.2 47.4 55.9 196 el 9.5 42.6 53 1967sf 8.9 39.2 45.6 1968 8.8 39.2 43.9 1969 9.8 41.7 47.2 1970 8.8 39.2 44.5 1971 9.8 39.1 43.8 1972 9.8 35.9 39.7 1973 10.3 31.0 34.7 1974 10.3 32.9 40.6 1975 17.3 38.3 46.7 1976 22.7 49.6 59.4 1977 23.1 45.8 54.5 1975 21.5 37.0 41.4 1979 23.5 35.8 42.9 1980 28.1 39.0 45.8 1981 28.1 38.9 45.4 1982 32.5 45.7 53.2 1983 29.0 41.7 46.8 1984 26.2 384 42.3 1985 26.6 38.7 42.1 1986 26.3 32.5 34.5 1987 24.5 27.6 28.5 1988 23.5 24.7 25.4 1989 26.5 28.0 28.7 1990 30.8 30.8 30.0 1991 33.3 32.5 32.5 1992 31.6 29.7 28.5 1993 28.1 26.2 24.9 pr92e2ted 1994 26.8 24.2 23.0 1995 211.0 24.6 23.4 1996 29.5 25.1 24.0 2000 33.0 25.3 24.1 2005 37.0 252 2äM9 af Brazilan snterfeed. Companhia Vale do Rio Doc (CVRD). For 1958-65. Itabm 68% fe In drv wel0. f.o.b. ~dces for European madks 1966-74. contact ~d. to Gennanv (Federal ReDubic for 642% fe: 1975-85. standard sliner eed 64% fk bofninu 1986. Souhum System Iltabira and other southem mines) 64% fe; 1988-89. 64.3% from 1990 onwards. 64.3%. b Prices are shown in US dollars per metric ton of ron co~nt (fe). octlvaeont to US efle uni 1 %). cf Deated by G-5 Manufacdurin Unt Valuo (MUV) Index. cVDeated by G-7 Consumer Prce Index (CPI). et Esömates. Sources: Coompanhia Vale do Rio Doco fafiual); World Bank International Ecnomics DearIent (p~lected). 153 Steel Summary * Apparent steel consumption in high-income countries declined by 3.2% in 1992 because of weak economic activity in most of these countries. A slight recovery is expected in the mid-1990s, but virtually no growth is expected over the 1992-2005 period. * Steel consumption in the LMICs dropped by 3% in 1992 largely because of sharp declines in the FSU and East European countries. For the LMICs, the average annual growth rate for the 1992-2005 period is projected at 1.9%. The LMICs' share of world steel consumption is expected to increase from 51 % in 1992 to 58% in 2005. * Sizable capacity cuts are expected in the EU member countries. Over the period 1992- 2005, no growth in total production is anticipated in high-income countries. In contrast, production in the LMICs is expected to grow by about 1.6% p.a., with the Asia and Pacific region expanding much faster (3.5% p.a.) than other regions in the group. Steel Product Price Indices, a/ 1969-2005 (19-1(I) 18D 12 10D* 40 & * 19W9 1972 1975 1978 1981 19B4 1957 19D 199 la9 19 2002 2005 af Onipatpriceirdoes(199m-100)fort.abL JaPEn 1Y DEatedbyssiU. 154 * Privatization in Latin America has brought in new investment and profitability to the steel industry, but has resulted in higher market concentration and intensified foreign trade friction. Steel industries in the FSU and Eastern Europe have suffered sharp declines in production, significant loss of employment, and the process of privatization has been slow. * New technologies such as thin slab casting, steel scrap substitutes, and computer controls have given other developing countries more opportunity to develop their own competitive steel industries. * In constant dollar terms, the World Bank steel price index (WBSP) is expected to increase 1.1% in 1994 and 1.4% in 1995, after an estimated increase of 3.4% in 1993. The projected long-term trend for the WBSP index from 1995 to 2005 is almost flat. Demand Outlook A fall in demand in high-income countries, Eastern Europe, and the FSU was not completely offset by gains in Asia and Latin America. World steel consumption decreased by an estimated 10.5 million tons or 1.4% in 1992. The fall was most pronounced in high-income countries (11.3 million tons, or 3.2%) and in Eastern Europe and the FSU (30 million tons, or 20.0%). The LMICs in Asia registered an increase of 22.7 million tons, or 14.6%, while in Latin America consumption grew by 1.4 million tons, or 4.8% in 1992. The relationship between steel demand and growth in GDP is not one-to-one, particularly in OECD countries where the linkage is relatively weak. Changes in the composition of GDP towards declining shares of the steel-intensive sectors (e.g., manufacturing) and increasing shares of less steel-intensive sectors (e.g., services) has resulted in the weak relationship. In the LMICs, however, rapid GDP growth has been associated with strong growth in steel demand. Table I shows that demand elasticities for steel with respect to GDP are low in OECD countries, except for Germany and Japan where the manufacturing sector has performed relatively well. Demand elasticities in OECD countries with respect to industrial and construction value-added are generally higher than those with respect to GDP. Steel demand elasticities in the LMICs are relatively high and are similar in magnitude with respect to GDP and industrial output. HIGH-INCOME CouNTRIEs. Recovery in the United States, declines in EU and Japan. The current sluggishness in economic activity in high-income countries continues to depress steel consumption. Following a 0.6% drop in the industrial production index in 1992, total OECD countries' steel consumption fell by 3.1% in 1992. Among the major industrial countries, only the United States has begun to recover. Economic conditions in other countries worsened in 1992, particularly in France, Germany, and Japan; steel consumption levels declined in these countries over the same period. 155 Table 1: Elasticities or Demand in Selected Countries at GDP Value-added Value-added Industry Construction United States -0.27 0.27 0.34 Germany 0.72 1.26 France 0.15 0.86 United Kingdom 0.28 Japan 0.80 0.69 Brazil 0.57 China 0.67 0.57 Korea, Rep. of 1.35 1.08 1.18 India 0.99 3/ Based on double log regression for 1980-91. Source: World Bank. International Economics Department. Besides the cyclicality of steel consumption growth caused by general economic fluctuations, other often cited reasons for the gradual decline in steel consumption in high-income countries are: (i) the sluggishness in the construction and other infrastructure sectors; (ii) the diminishing importance of heavy industries in favor of information and service industries; and (iii) material substitution for steel by other lighter and stronger materials in the automobile industry. Table 2 shows the material mix of a typical US family vehicle in 1972 and 1992. Over the 20-year period, there was a 315 kg reduction of carbon steel per vehicle. Other iron and steel materials all saw their shares decline except for medium- or high-strength steel. The net loss of all iron and steel materials per vehicle was about 360 kg. Growth in the US economy will not translate into increased demand for steel in the long-run. The US economy showed signs of recovery in 1992. The industrial production index was 2.3% higher in 1992 than in 1991. Significant growth was posted in both the automobile (9.2%) and machinery (3%) sectors. Other steel-using sectors generally grew by around 1.5%, except for the mining and non-residential construction sectors that continued to remain sluggish. Overall, apparent steel consumption in the United States increased by 6.5% in 1992. Given the performance of the US economy in the first three quarters of 1993, when the industrial production index rose by 2.1%, apparent steel consumption is expected to show an increase by 4.2% for all of 1993. With further strengthening of the economy in the mid-1990s, US steel consumption is expected to grow by 1.8% in 1994 and 1995, and to recover to the level before the 1991 slump. However, consumption is expected to decline slightly over the 1995-2005 period as the US economy continues to shift structurally out of the manufacturing sector. The growth rate in demand for the 1992-2005 period should average out to about zero. EU demand for steel is expected to be flat. In 1992, the EU fell further into recession. The industrial production indices of Germany, France, and Italy were down by 2%, 1.6%, and 1.6%, respectively, compared with 1991. Consequently, apparent steel consumption 156 Table 2: Material Mix In a Typical US Family Vehicle 1972 1992 (kg) (%) (kg) Carbon Steel 943.9 55.2 628.., 44.1 Medium or High Strength Steel 54.7 3.2 112.6 7.9 Stainless Steel 270.2 15.8 235.1 16.5 Miscellaneous Steel 25.7 1.5 18.5 1.3 Iron 254.8 14.9 195.2 13.7 Subtotal I.549.3 90.6 1.189.9 83.5 Plastic 73.5 4.3 111.2 7.8 Aluminum 39.3 2.3 78.4 5.5 Copper, Brass and Zinc 35.9 2.1 27.1 1.9 Other Materials 12.0 0.7 18.5 1.3 Total 1,710.0 100.0 1,425.0 100.0 Source: American Metal Market - "Automotive Materials". November 4, 1993. dropped by 4.8%, 11% and 4.1%, respectively. Total steel consumption by the EU declined by 1.9% in 1992. Given the economic performance of the first three quarters of 1993, it appears that the negative trend in demand continued in most EU countries. Steel consumption is expected to decrease again in 1993, for the fourth consecutive year. In particular, German and French steel consumption is expected to decline by 8% and 5.9%, respectively. Modest recovery is expected for the EU countries in the second half of 1990s and the first half of 2000s. Similar to the United States, the average annual growth rate for EU steel consumption in the 1992-2005 period is expected to be virtually zero. Japan experienced a 6.2% decline industrial production in 1992. Growth in the steel-using sectors was mostly negative. For example, consumption by the machinery sector was down by 16%; electronics by 9.6%; non-residential construction by 6.9%; and the automobile by sector 0.7%. In total, steel consumption in Japan fell by 14.8% in 1992. Judging from preliminary data for 1993 where the industrial production index increased by 2.3%, the Japanese economy is expected to recover in 1994 and 1995. Steel consumption is forecast to grow modestly to 1995 and then decline slightly over the long run. LMICs. Growth in Chinese demand for steel spurs the steel price. The impressive economic progress in China since 1978 resulted in rapid growth in steel consumption, by 7% p.a. over the 1978-92 period. GDP growth in 1992 was 12.8%, growth in industrial production was 20.8%, and gross fixed investment rose by 28.2%. Steel consumption increased by more than 15% in 1992. In the first half of 1993, the Chinese economy accelerated at an even faster pace than in 1992. The extraordinary increase of Chinese steel imports resulted in a 5-15% rise in steel priccs on the international market during the first half of 1993. Despite measures by the Chinese government to cool down the overheated economy, steel consumption is estimated to 157 have grown by 13.9% in 1993. We expect that China's steel consumption growth will gradually slow down over the long-term to 4% p.a. in the second half of the 1990s and to less than 3% p.a. beyond 2000. The Chinese economy will likely exhi- a more stable growth pattern over the long-term and the industrial use of steel will probably become more efficient. The Asia and Pacific region has had the fastest rate of steel consumption growth over the past 20 years. It is expected to continue over the forecast period because of the strong economic growth in China and in t.-ther East Asian countries. In addition, India will bcnefit from its steel market liberalization measures by posting large gains in steel consumption. For the region as the whole, the average annual growth rate of steel consumption over the 1991-2005 period is projected at 3.1%. Sharp declines in Eastern Europe and the FSU. Economic conditions in Eastern Europe and the FSU have continued to worsen. GDP and industrial production in the FSU declined by about 20% in 1992 and investment fell by 45%. As a result, steel consumption in the FSU dropped by 12.8%. Further declines in steel consumption are expected at least through the mid-1990s because the FSU economy is expected to remain weak and the reform of steel prices will significantly reduce steel consumption by inefficient industries. Some East European economies started to show signs of recovery in 1992. They are countries chat have made substantial progress in economic reforms, such as the Czech Republic, Hungary, Poland, and Slovakia. In other countries, notably Bulgaria and Romania, economic activity has continued to wor- n. For Eastern Europe as a whole, steel consumption declined by around 30% both for 1991 and 1992. However, some modest gains in steel consumption can be expected by mid-1990s. Over the period 1992-2005, Eastern Europe and the FSU are expected to register a 1.2% p.a. decline in steel consumption, because of the large drop in the early 1990s. For the LMICs as a whole, strong growth in steel consumption in the Asia and Pacific region will more than compensate the declines in Eastern Europe, and post modest gains over the forecast period. For the world as a whole, steel consumption is expected to record an average growth rate of 1.0% p.a. over the 1992-2005 period. The share of steel consumption of the LMICs will increase from 51% ia 1992 to 58% in 2005. Supply Outlook Because of weak demand and strong competition from imports, steel production of high-income countries declined by 2.3% in 1991 and by 3% in 1992. In 1991, significant reductions in production were registered in the United States and the United Kingdom. In 1992, steel production in other major OECD ste h-producing countries declined considerably. In the United States, production started to rec- ver in 1992 with the help of tough import protection measures. In Japan, the sharp growth of steel exports to China helped its steel industry to 158 recover. Production conditions in the EU, particularly in Germany and France, have not yet shown signs of improvement. The problem of excess capacity. Excess capacity has always been a serious problem for high-income countries since the first oil shock in the 1970s. Lower operating rates have resulted in financial difficulties for many steel producers in these countries and prompted governments to apply import protection measures and give subsidies to their respective steel industries. Table 3 shows crude steel effective capacities and associated operating rates for the major steel-producing countries. The crude steel effective capacity indicates the level of steel output expected in 6 to 12 months if steel prices go up sufficiently. The effective-to-gross capacity ratios vary across different regions of the worY, usually with higher values for high- income countries. Effective capacity on average is eqJ to about 86% of gioss capac;ty. 11 can be seen that total effective capacity for high-income countries was reduced by 85 million tons between 1980 and 1990, with the United States, the EU, and Japan each accounting for about 20 million tons. Operating rates were relatively high in the late 1980s due to capacity reductions. However, the rates started to decline in 1991 and 1992, indicating the possibility of another round of capacity reductions in high-income countries. Capacity reductions in the EU. It is estimated by the EU Commission that at least 22 million tons of Fteel-producing capacity needs to be reduced in EU member countries by the mid-1990s. For state-owned steel mills, which account for over half of total EU steel production, the EU Commission has followed a "subsidies for capacity cuts" policy by which government subsidies are allowed only if target capacity cuts are met. Agreements have been reached for capacity reduction of about 5 million tons so far. However, there are still about 5.5 million ton reductions that need to be agreed with the governments of Germany, Italy, Portugal, and Spain, in exchange for 6.8 billion ECU (US$8.2 billion) subsidy. For private steel producers, the EU Commission has targeted 17 steel companies for 10.5 million ton capacity reduction. For compensation, the EU Commission will give European Coal and Steel Community (ECSC) loans of about I billion ECUs (US$1.2 billion) to these companies. Of the 10.5 million tons, 6 million tons will be from the hot-rolled coil producers, 2 million tons from plate, and 2.5 million tons from heavy sections. Despite great efforts, final agreements have yet to be reached. In the near term to 1995, steel production in high-income countries is expected tc regain small positive growth. Over ne long term to 2005, production will remain lagely unchanged with a mild downswing around the year 2000 and a moderate upswing by 2005. Nominal capacity reductions are expected to be seen in United States and Japan. and sizable capacity cuts are expected to be achieved by EU member countries. Compared with previous forecasts, the outlook for US steel production is better, but the outlook for other major high- income steel-producing countries is poorer. The net result is about 40 million tons less projected production for the year 2005 than shown previously. LMICs expand capacity. Table 3 shows that crude steel effective capacity of the LMICs followed a different trend than that of high-income countries. The effective capacity for this group of countries continued to increase until 1990. The operating rate was also high 159 Table 3: World Crude Steel Elfective Capacity and Operating Rate 1970 1975 1980 1985 1990 1991 1992 Capacity (million tons) High-Income 415.6 474.3 498.0 454.6 413.3 4190 420.4 United States 131.1 131.1 128.0 112.3 102.2 102.0 100.1 EU 136.6 172.3 167.4 140.9 149.2 154.1 152.5 Japan 102.6 121.8 138.6 130.5 112.0 111.4 115.6 Other 45.3 49.1 64.0 70.9 49.9 51.5 52.2 LMICs 213.2 269.5 326.5 380.9 423.6 421.2 409.7 China 37.3 51.7 74.3 77.8 82.7 FSU 149.9 156.6 156.7 156.6 142.6 Other 139.3 172.7 192.6 186.9 184.5 World 628.8 743.8 824.5 835.5 836.9 840.2 830.1 Operating Rate (%) High-Income 94.5 81.0 79.9 80.5 92.5 88.6 85.6 United States 90.9 80.7 79.3 71.3 87.8 78.2 84.2 EU 101.0 72.9 76.4 85.0 91.7 89.2 86.8 Japan 90.8 84.0 80.4 80.7 98.5 98.4 84.9 Other 93.3 103.0 89.4 85.4 91.3 86.0 86.6 LMICs 95.1 96.1 97.3 92.7 90.3 86.7 88.1 China 95.7 90.6 89.4 91.3 97.2 FSU 98.7 98.8 98.5 84.9 81.9 Other 96.3 87.8 83.9 86.4 88.9 World 94.7 86.5 86.8 86.0 91.4 87.6 86.9 Source: Paine Webber, World Steel Dynamics, Steel: Who are the Winners in the 1990s, June 22, 1993. compared with high-income countries. In 1991 and 1992, however, total effective capacity of this group declined as well as the operating rate because of sharp declines in steel production capacity in Eastern Europe and the FSU. Production for 1991 and 1992 declined by 6.5% from 1990-92 for the LMICs. However, excluding Eastern Europe and the FSU where production declined by 28.5% in two years, other LMICs actually registered an impressive 15.1 % gain in total production. Most of these increases were in the Asia and Pacific, whcre, between 1990 and 1992, there was an increase of 15 million tons of steel production in China, 5 million tons in the Republic of Korea, and 3 million tons in India. The combined production of the three countries exceeded the decline of 20 million tons in OECD countries over the same period. Production in the LMICs is expected to grow on average by about 1.6% p.a. over the 1992-2005 period. Recent declines in production are expected to be reversed by the mid- 1990s when the sharp drop of production in Eastern Europe and the FSU is expected to stop. For the Asian and Pacific countries, the average annual 160 growth rate over the forecast period is projected at 3.5%, the highest of all regions. Structural changes in Eastern Europe and the FSU will likely make the recent production cuts permanent and a decline of 1.2% p.a. is expected over the 1992-2005 period. Attention is on China. Steel production in China has been increasing at a rapid rate, from 32 million tons in 1978 to 80 million tons in 1992. The average annual growth rate during the 1978-92 period was 6.6%. Production for 1993 is estimated at over 87 million tons. Steel market liberalization has completely freed domestic steel prices since the beginning of 1993. Steel companies in China are given the authority to plan production and acquire raw materials. Cumulatively, about US$6 billion was invested from 1978 to 1992 to expand and modernize the Chinese steel industry. Three new integrated steel mills will 'o: built before 2000 in the provinces of Shandong, Zhejiang, and Guangdong. In addition to the large-scale greenfield projects, the Chinese government calls for more investment in the steel industry in order to popularize the advanced technology and production processes, and optimize the industry structure by creating steel enterprise groups. About two thirds of the projected production increases will come from renovation and expansion of existing plants. The situation in Russia and Eastern Europe is critical. The Russian steel industry which accounted for 60% of total FSU output, has suffered huge losses since the late 1980s. Production dropped by a total of 30 million tons, or by 45% over the 1990-92 period. The operating rate was only 65% of the total production capacity in 1992. Even at such low levels of production, about 30% of rolled products were left unsold. Drastic declines of military orders and the sluggish residential construction sector were the main factors in the decline of domestic demand for steel. It is estimated that 85% of steel mills in Russia are now effectively bankrupt and are sustained by "soft loans" from the government. Restructuring measures in the Russian steel industry include replacing the powerful Ministry of Metallurgy by the State Committee for Metals and converting about 70% of steel mills into joint stock companies in which 50% is to be owned by workers, 30% sold at voucher auctions, and the other 20% retained by the government. However, these restructuring measures have yet to prove effective in reviving the steel industry beset by shortage of capital investments. Problems facing the Russian steel industry include outdated technology, environmental pollution, disrupted raw material supplies, difficulties in expanding exports, overstaffing, and lack of investments. Regarding steel-producing technology in Russia, the open hearth process still accounts for 50% of production and the continuous casting ratio is only 23%. Compared with OECD countries, a ton of Russian steel requires 20% more raw materials, 30% more energy, and 200% more workers. The Russian steel industry has not yet fully adjusted to the break-up of the FSU. Iron ore supplies from Ukraine and Kazakhstan, which satisfy a quarter of total iron ore demand in Russia, have become irregular. Russian steel exports account for about 15% of total production. Expanding exports has proven to be difficult because of export tariffs and quotas, low product quality, transportation bottlenecks, and protectionism in importing countries. The Russian government estimated that about US$12 billion in investment is needed to overhaul the steel industry between 1994 and 2000. Most of the money will have to come from foreign countries, through privatization processes or loans. 161 The situation in other East European countries is also serious. In the former East Germany, nearly all major steel plants have been privatized. Steel production dropped from 8 million tons before the unification to 3 million tons in 1992. Employment in the steel sector declined from 65,000 workers to 24,000. In the Czech Republic and Slovakia, the combined steel production fell from 15.5 million tons in 1989 to 11.1 million tons in 1992. The total workforce also shrank from 140,000 to 126,000. The process of privatization has been slow. Although all steelworks have been reorganized as joint stock companies, most shares are still held by state privatization agencies. In Romania, crude steel production fell from 13.4 million tons in 1989 to 6 million tons in 1993. Progress has been slow in restructuring the industry and privatization just started in 1992 because of lack of investment and readily available financial resources. Production costs fal for integmted steel mills. Table 4 presents the recent estimates of the cost structure of integrated steel mills in major steel-producing countries. Compared with the cost estimates in our previous report: (Market Outlook for Major Primary Commodities, 1992), operating costs have been reduced for all countries except for the Republic of Korea and total pretax costs are down for all countries except for Brazil and the Republic of Korea. The average pretax cost reduction is about $20/ton. The most cost reduction was achieved in United Kingdom ($75/ton) and the least was in Japan by only $7/ton, largely resulting from changes in their respective exchange rates. Judging from the table, except for the FSU, it is not clear which country has a significant cost advantage. Contrary to common belief, the LMICs such as Brazil, the Republic of Korea, and Mexico, do not have the pretax cost advantage because of their high financial cost. The only low-cost steel-producing country appears to be the FSU due to its low raw material and labor costs, and relatively low financial costs. However, it is highly doubtful that the current cost conditions can be sustained in the long term in view of the adjustments taking place in the FSU.. The development and application of new technologies. Technology has always been the main vehicle for the steel industry to enhance productivity and reduce cost. According to industry experts, there are three areas where technological advances are most profound. The first is the thin-slab/flat-rolling plant which gives minimills the access to the flat product market that traditionally belongs to integrated steel mills. Attributes of such plants include reduced economies of scale, reduced capital intensity per unit of capacity, lower operating costs and lower fixed costs. The second is the steel scrap substitute process. The DRI technology has been improved and new processes such as iron carbide are being developed. With relatively low cost and capacity commitment, these processes provide minimills with virgin iron without the need for coke. The third is the use of computers to optimize production planning and upgrade product quality. All three areas of technological advancement will further enhance the cost advantage of minimills over integrated steelworks, and will make it possible for the LMICs to develop their own cost competitive steel industries. 162 Privatization in the steel industy has positive results but problems remain. The wave of privatization of state-owned steel industries has swept most parts of the world, particularly in Latin America. Lessons learned from the privatization processes in Brazil and Argentina are quite illustrative. Between October 1991 and September 1993, the Brazilian government sold five major steel mills and a number of minimills that accounted for 70% of the country's steel production. The new owners--mostly banks and private producers--have brought in funds to upgrade facilities in order to keep the steelworks cost and quality competitive. New production lines are expected to be build in Usiminas which was sold to private hands in October 1991. Newly privatized steel mills also have become more profitable because of more efficient management and operations. Usiminas' profit has grown from $59 million in 1991 to $135 million for the first half of 1993. CSN, which was privatized in April 1993, is expected to post a $60 million net profit compared with losses made under government ownership. Table 4: Cost Structure of Integrated Steel Mills In Major Steel-Producing Countries a/ US Japan Germany UK France Canada Australia Korea Brazil Mexico FSU Operating rate(%) 90 90 90 90 90 90 90 90 90 90 60 /O Ratio (Liq/CR) 1.196 1.146 1.196 1.202 1.196 1.202 1.213 1.185 1.253 1.389 1.199 Raw materials 143 120 151 140 139 137 120 134 143 177 66 Coking coal 37 36 44 41 40 35 25 41 56 52 19 Iron Ore 65 51 69 61 61 62 54 52 40 77 40 Scrap 41 33 38 38 38 40 41 41 47 48 7 Other material 140 188 179 152 159 155 159 157 186 185 105 Labor cost 153 153 182 103 149 146 128 90 74 118 8 Cost/hour 30.0 30.0 33.0 18.0 27.5 26.0 21.0 12.0 8.0 8.5 0.3 Man hour/ton 5.1 5.1 5.5 5.7 5.4 5.6 6.1 7.5 9.2 13.9 27.2 Operating cost 436 461 512 395 447 438 407 381 403 480 179 Financial cost 41 98 53 21 49 48 50 127 135 60 15 Depreciation 26 76 42 20 36 32 23 112 83 30 10 Interest 15 22 11 1 13 16 27 15 52 30 5 Pretax cost 477 559 565 416 496 486 457 508 538 540 194 Cost thr process Coke 117 104 129 109 117 110 71 101 119 96 42 Blast furnace 149 129 159 132 141 138 114 120 122 141 71 Liquid steel 198 188 214 180 196 195 176 172 185 199 82 Slabs 232 223 255 211 229 230 205 202 217 238 101 Hot rolling 302 293 340 272 299 302 273 254 277 324 123 Cold rolling 387 386 445 350 391 392 359 326 363 436 147 Add Taxes 436 461 512 395 447 438 407 381 403 480 179 al ($/Ton Shipped as of March 1993) Sour-e: Paine Webber, World Steel Intelligence. Price Track #42. July 7, 1993 163 The largest steel maker in Argentina, Somisa, was privatized in November 1992. Before its privatization, Somisa's operation was so inefficient that it lost almost $1 million per day. After privatization, the new owner significantly rationalized the company. Production was cut from 2 million to 1.2 million tpy, and employment was reduced from 14,000 to 5,000. As a result, Aceros Parana (the new name for the company) has started to see positive cash flows and expects to earn profits soon. However, there were also problems relating to privatization. In Brazil, some alleged abuses of privatization include eliminating regional competition by shutting down a rival's operation after purchase and forming conglomerates to oligopolize the market. Currently, the Usiminas group controls 60% of flat-rolled steel and 100% of plate produced in Brazil. In Argentina, anti-dumping charges against steel imports from Brazil filed by private steel producers have threatened to delay the establishment of the Southern Cone Common Market (Mercosul) with proposed zero import tariffs between Brazil, Argentina, Uruguay, and Paraguay. The anti- dumping action has reduced the inflow of imports from Brazil to Argentina for products such as hot-rolled and cold-rolled sheets and billets. Market analysts agree that trade friction is likely to intensify in the form of non-tariff barriers, even after Mercosul comes into effect. Trade Prospects Due to structural changes in world steel production and consumption, there has been a significant increase in world trade of steel. About 20% of world steel production was traded in 1970 and this share increased to 30% in 1990. Table 5 shows net trade of major steel- producing and consuming countries derived from production and consumption data. OECD countries have traditionally been net exporters of steel except for the United States. The LMICs as a whole have been net importers. Such patterns of the steel trade are expected to change little over the forecast period. Despite the rapid growth in trade, steel is subject to a wide range of protective measures by various countries. Governments in many countries use tariff and non-tariff barriers to protect domestic steel producers. Major steel-producing countries such as the United States and the EU have traditionally relied more on non-tariff barriers. During the mid-1980s to early 1990s, the United States and the EU made extensive use of "voluntary export restraints" (VER) and anti-dumping charges against some 20 to 30 countries and regions. About 50-75% of iron and steel imports by value into the EU and the United States were subject to non-tariff barriers. At the expiration of the VER system in United States in March 1992, US steel producers filed 84 anti-dumping complaints against 20 countries, which affected $3 billion worth of steel imports to the United States. In the EU, after VER expired in 1987, various governments have used production and/or export subsidies as the main form of assistance to their steel industries. These subsidies have allowed the EU to continue to be a net exporter of steel products. Recently, the EU has again initiated quotas for East European countries' steel exports. Japan, the Republic of Korea, and other East Asian countries have relied somewhat on implicit forms of non-tariff protection, mainly 164 Table 5: Steel (Crude Equlv.) - Net Trade a/ By Main Countries and Economic Regions 1969-71 1979-81 1990 1991 1992 1993 1994 1995 2000 2005 -(000 tons) High-Income 19,602 38,277 3.339 8,313 8,795 9,277 11.359 12,538 13,835 13,080 OECD 21,580 44,727 13.698 20,793 17,309 17,924 20,031 21,197 17,062 18,832 United States (12,309) (16,096) (15,612) (13,587) (15,294) (17,000) (16,450) (15,899) (13,146) (10,750) Germany 1,405 5,386 4,268 3,081 2,445 1,810 1,687 1.654 1.739 1,874 France 790 3,149 939 1,846 3,101 2.785 2,243 2,298 2,639 2,919 United Kingdom 2,767 (1,328) 1,151 1,874 1.588 1,303 1,199 1,094 574 341 Italy (2,335) 1,310 (3,022) (1,483) (621) (1,710) (2.799) (2,834) (2,999) (2,495) Japan 24,ET 32,171 11,307 10.500 12.603 14,706 14,597 15,525 15.763 13.630 H LMICs (19,602) (42,677) (6.142) (3.527) (8,795) (9,277) (11,359) (12,538) (13,835) (13.080) 0 Americas (6,647) (6,208) 11,915 10.476 10,990 11,451 11.647 11.843 12.824 13.128 Brazil (898) 1,104 10,377 12,743 13,465 14,108 14.295 14.482 15,418 16,098 Asia and Pacific (8,677) (17,052) (20,899) (16,083) (26,310) (26,904) (26.770) (26.635) (25.962) (27.144) China. People's Rep. (3,089) (6,620) (2,070) (42) (2,833) (8,252) (6,716) (6,679) (6,497) (6.426) Korea, Rep. of (845) 1,947 1,645 (189) 795 4,607 4.584 4.561 4,448 5,898 India (403) (2,542) (6,737) (3,200) (3,117) (4.212) (4.477) (4.742) (8,252) (11.490) Europe 4,498 (2,210) 14.309 12,267 23.177 1.609 1,518 1,427 971 811 FSU 5,468 (2,458) 1.858 974 4,459 149 146 43 279 360 World 0 (4,399) (2,803) 4,785 0 0 0 0 0 0 al Net exports or (imports).. Source: World Bank, International Economics Department. discretionary import licensing, foreign exchange controls, state trading monopoly, and stringent health and safety regulations. Trade agreements being negotiated would reduce price distortions. The above mentioned non-tariff barriers in different countries and regions impose high levels of distortion for the international trade of steel. In theory, there should be substantial gains to the world economy if these trade barriers were lowered or eliminated. Negotiations for a multilateral steel agreement (MSA), under the auspices of the GATT, are currently under way among a number of countries including Australia, Austria, Brazil, the EU. Finland, Japan, the Republic of Korea, Mexico, and the United States. These countries account for 85% of total world steel trade. The MSA proposes to reduce or remove subsidies, tariffs, non-tariff barriers, and anti-competitive arrangements for the international trade of steel. An extensive list of steel products are covered under MSA, ranging from steel ingot to highly processed products. The main obstacles to the successful conclusion of MSA negotiations have been disagreements on the EU's subsidy policy to its steel producers and US anti-dumping actions. Price Outlook Table 6 presents historical data and forecasts for the World Bank Steel Price (WBSP) index and the underlying Japanese export prices of eight major steel products. Due to the economic recession and declining steel consumption (-3.2%) in the high-income countries, the WBSP index fell by 11.2% in 1992. Among the individual steel products, the price of merchant bar registered the largest decline (-22.2%), followed by sections (-19.9%), rebar (-18%), and galvanized sheets (- 12.2%), as the construction and automobile sectors in most OECD countries experienced slump. Chinese imports support the price of many steel products. The sharp increase in Chinese imports in the first half of 1993 helped push up international steel prices. Chinese imports were concentrated in construction materials. For 1993, merchant bar prices increased by 16%, rebar by 12.9%, and sections by 7.7%. These are the products that suffered large price declines in 1992. Prices for flat products (i.e., cold- and hot-rolled sheets, plates and galvanized sheets) did not increase significantly in 1993, reflecting the recession in most OECD countries and the depressed conditions in automobiles, consumer durables, and machinery. As a whole, the WBSP index registered a 3.8% gain in 1993 over 1992, the first time the index increased since 1990. In constant dollar terms, the index rose by 3.3% in 1993, a remarkable increase considering that most OECD countries were in a recession. Steel product prices are expected to continue to rise in 1994. Since Chinese steel imports will not continue at the unusually high level of 1993, we do not expect sharp price increases for any particular product. Prices for the eight products in the international market are expected to rise modestly along with the recovery of the global economy in 1994. The WBSP index in current dollar terms is expected to increase by 4.5% in 1994, or by 1.1% in constant dollars. 166 Table 6: Steel Product Prices a. 1969-93 (Actual) and 1994-2005 (Projected) World Bank HR Galy. Merchant Wire Year Steel Index b/ Sheets Sheets Bars Plates Sections Rod Rebur (1990=100) $1---------- --------------(curentSon)----------------- ---- ACOW 1969 26.5 107.5 155.9 108.0 130.4 99.3 1970 30.5 134.2 169.3 106.0 137.1 129.0 1971 27.9 112.2 169.4 105.9 127.8 116.5 1972 29.8 110.6 173.0 130.8 129.2 129.3 1973 45.5 165.8 255.0 211.3 195.4 183.8 1974 66.2 245.0 353.3 363.3 269.2 325.4 1975 52.1 216.3 296.0 237.9 227.5 248.3 1976 54.1 221.1 328.4 217.5 227.9 227.5 1977 53.2 217.5 311.3 216.7 229.5 228.3 1978 68.3 276.3 412.8 2904 308.0 284.2 1979 76.3 298.3 448.7 340.0 332.9 315.8 1980 79.3 323.3 471.0 342.5 341.7 358.3 350.8 330.8 1981 81.8 328.8 504.2 328.8 356.1 382.4 387.5 313.3 1982 70.6 281.7 431.7 258.3 309.2 333.8 353.3 242.5 1983 66.6 270.0 420.0 245.8 286.3 285.8 312.5 222.5 1984 70.2 283.8 452.1 266.4 305.1 300.8 308.8 233.3 1985 60.5 245.8 369.6 229.6 266.7 246.7 272.9 225.4 1986 61.6 269.6 384.6 229.2 285.4 248.8 239.6 219.6 1987 72.0 323.3 454.2 244.2 360.8 330.8 248.3 202.9 1988 94.1 395.8 625.0 370.4 432.5 433.3 313.8 262.5 1989 105.7 441.9 735.0 416.3 478.8 441.7 350.8 341.7 1990 100.0 411.3 634.2 412.9 458.8 438.3 362.9 364.2 1991 98.6 408.3 627.1 385.0 469.2 404.2 383.3 367.1 1992 88.1 369.2 555.3 308.3 445.0 331.3 372.5 306.7 1993 91.4 375.8 549.2 361.7 442.5 357.9 395.8 348.8 1994 95.6 391.7 588.3 374.5 457.7 389.2 409.4 362.9 1995 99.7 405.9 626.6 385.6 470.8 425.1 425.4 375.5 1996 102.9 419.0 646.9 398.0 486,0 438.8 439.1 387.7 2000 115.8 471.6 728.1 448.0 547.0 493.9 494.2 436.3 2005 131.2 534.3 824.9 507.5 619.7 559.6 560.0 494.3 al Steel prices are f.o.b. Japan excluding shipments to China and the United States. All products items refer to base size: cold rolled coil/sheet, hot-rolled coillsheet, galvanized iron sheet. merchant bars, medium plates. H-shape sections. wire rod, concrete reinforcing bars (rebars). b/ Composite steel price index is a weighted average price index (1990-100) based on available data for products given in the table. Weights used are shares of apparent consumption of each products in the Federal Republic of Germany. Japan and the United States during the period of 1984-86. Source: World Bank, International Economics Department. 167 Modest growth in the WBSP index is again expected for 1995 (4.2% in current terms and 1.4% in constant terms) as more OECD countries recover from the recession. The projected long-term trend for the WBSP index over the 1995-2005 period is almost flat in constant terms. Few steel mills are profitable with their present cost structure. Converting the WBSP index to a weighted average of eight steel product prices and comparing it with the cost structure of major integrated steel mills (Table 4), we find that the 1993 weighted average price of $460/ton is sufficient to cover operating costs of most steel mills except for Germany and Mexico. However, the price level is insufficient to cover pretax costs except for the United Kingdom, Australia, and the FSU. As a result, these steel producers were losing money in 1993. Our projections imply that the weighted average price will be $485/ton in 2000 (in 1993 dollars). This price level is not sufficient to cover pretax costs for many producers, assuming that the cost structure remains unchanged. However, given that steel mills are striving to improve efficiency and reduce costs, and that the high levels of depreciation in Brazil, Japan, and the Republic of Korea are expected to be lowered, most producers are likely to become profitable under the projected price. Steel prices have shown wide fluctuations since 1980. The volatility over the 1980-93 period is estimated at 11.5%, in terms of standard deviation of annual percentage changes. Uncertainties associated with the price forecasts are substantial. For example, we estimate that the WBSP index would be I1% below the base forecast for 1994 in nominal terms and remain at that level from the mid-1990s until 2000 if: (a) the economies of the EU and Japan remain in recession for the next few years; (b) the EU capacity reduction plan fails completely; (c) East European countries increase steel exports to the EU market; and (d) demand from China is curtailed due to austerity measures. On the other hand, the WBSP index could be substantially higher if OECD economies achieve strong growth in the rest of the 1990s, China's import demand increases sharply, and steel industry restructuring proceeds successfully in the EU, FSU, and Eastern Europe. 168 Table Al: Steel (Crude Equiv.) - Production By NMin Countries and Economic Regions Actual Projected Growth Rates 01 Averages Countries/ ..-...---******* 1992- Economies 1969-71 1979-81 1990 1991 1992 b/ 1993 1994 1995 2000 2005 1970-91 1950-91 2005 ('000 Tons) ------ C p.m.) - High-Income 388,478 412,080 384,435 370,390 359,615 358,692 362,297 367,038 351,629 360,530 -0.8 0.2 0.0 OECD 387,770 407,753 373,270 358,022 347,512 346,620 350,104 354,685 337,399 347,874 -0.9 0.0 0.0 United States 118,907 111,586 89,723 79,738 84 322 86,852 89,273 91,762 89,255 88,524 -2.4 -0.7 0.4 Germany 54,430 51,096 44,000 42,169 39,711 36,216 33 768 33,099 34,796 37,506 -1.6 0.1 -0.4 France 23,042 22,598 19,015 18,434 17,961 16,794 15,702 15.238 15,981 16,620 -1.6 -1.1 -0.6 United Kingdom 26,316 16,105 17,541 16,474 16,050 16,371 16,371 16,536 15,232 15,273 -2.3 3.2 -0.4 Italy 17,052 25 176 25 467 25,110 24,904 25 402 25 529 25,722 24,713 26,638 1.2 0.t 0.5 Japan 68,015 108,213 110,339 109,649 98,132 101,076 101,400 103,200 100,000 100,000 0.2 0.4 0.1 LMICs 201,205 311,200 385,907 366,003 349,493 340,646 347,400 355,266 391,282 447,783 3.1 2.4 1.9 Americas 13,108 27,928 38 388 39,255 41,180 42,910 44,600 46,209 48,052 49,193 5.9 4.3 1.4 Brazil 5,437 14,152 20,567 22,617 23,898 25,039 25,520 26,000 27,364 28,572 7.6 5.8 1.4 a' Asia and Pacific 27,732 61 994 118,482 128,404 140,842 152,000 158,299 164 634 194 827 222,931 7.6 7.1 3.5 ' China, People's Rep. 18,333 35,736 66,349 71,000 80,037 87,000 90 794 95,017 111,486 127,265 6.7 6.9 3.6 Korea, Rep. of 442 8,974 23,125 26,001 28,054 32 000 32,669 33,163 38,134 42,656 21.0 9.8 3.2 India 6,311 10,135 14.963 17,100 18,117 18,000 18,641 19,080 21,238 23,669 4.5 4.9 2.1 Europe 154,481 208,638 212,464 179,127 159,790 125,000 123,087 121 680 128,885 136,634 1.3 -0.1 -1.2 FSU 115,613 148,512 154,414 132,819 116,827 97,000 93,632 90,679 93,974 97,478 1.1 0.1 -1.4 World 589,682 723,280 770,342 736,392 709,108 699,338 709,697 722,303 749,911 808,313 0.9 1.2 1.0 a/ Least squares trend for historical peritJs (1970-91); end-point for projected periods (1992-2005). b/ Estimate. Sources: International Iron and SteeL Institute (actual); Vorld lank, International Economics Department (projected). Table A2: Steel (Crude Equiv.) - Apparent Consumption Sy Main Countries and Economic Regions Actual Projected Growth Rates a/ --------------------------------------------------------------------------------------------------------------------- Averages Countries/ --e------.*.**.. 1992- Economies 1969-71 1979-81 1990 1991 1992 b/ 1993 1994 1995 2000 2005 1970-91 1980-91 2005 .......................................... (000 Tos)----------------------------------- ( p.e.) --------- High-Income 372,279 376.346 380,914 362,077 350,820 349,415 350,938 354,499 337,793 347,450 -0.6 1.3 -0.1 OECD 369,583 365,570 359 390 337,229 330,203 328,696 330,072 333,488 320,337 329,042 -0.8 1.0 -0.0 United States 131 216 121,682 105,335 93,325 99,616 103,852 105 723 107 661 102,401 99,274 -1.8 -0.6 -0.0 Germany 56,418 48,253 39,550 39,088 37 266 34,407 32,081 31,445 33,058 35,632 -2.1 1.4 -0.3 France 22 ,252 19,449 18 076 16,588 14,860 14,009 13 459 12,940 13,342 13,701 -2.2 -0.5 -0.6 United Kingdom 23,549 17,433 16,690 14,600 14,462 15,068 15,172 15,441 14,658 14,932 -2.4 0.4 0.2 Italy 19, 387 23,866 28,489 26,593 25,525 27,112 28,328 28,556 27,712 29,133 1.3 2.3 1.0 Japan 63,063 76,102 99,032 99,149 85,529 86,370 86,803 87,675 84,237 86,370 1.4 3.2 0.1 LMICs 220,807 353,877 392,049 369,530 358,288 349,922 358,759 367,804 412,117 460,863 2.6 1.3 1.9 Americas 19 755 34,136 26,473 28,779 30 190 31,459 32,953 34,366 35,228 36,065 1.1 -0.9 1.4 Brazil 6,335 13,048 10,190 9,874 10,433 10,931 11,225 11,518 11,946 12,474 1.8 -0.6 1.4 Asia and Pacific 36,409 79,046 139,381 144,487 167,152 178,904 185 069 191,269 220,788 250,075 7.1 6.3 3.1 China, People's Rep. 21,422 42 356 68 419 71,042 82,870 95 252 97,509 101 696 117,983 133,692 6.6 5.9 3.7 o Korea, Rep. of 1 287 7,027 21,480 26,190 27 259 27,393 28,085 28,602 33,686 36,757 14.1 13.3 2.3 India 6,714 12,677 21 ,700 20,300 21,234 22,212 23,118 23,822 29,490 35,158 5.5 5.7 3.9 Europe 149,983 210,848 198,155 166,860 136,613 123,391 121,569 120,253 127,914 135,823 1.1 -0.8 -0.0 FSU 110,145 150,970 152,556 131,865 112,368 96,851 93,486 90,635 93,656 97,117 1.3 -0.2 -1.1 World 593,075 730,223 772,963 751,607 709,108 699,338 709,697 722,303 749,911 808,313 0.9 1.3 1.0 a/ Least squares trend for historical periods (1970-91); end-point for projected periods (1992-2005). b/ Estimate. Sources: International Iron and Steel Institute (actual); World Bank, International Economics Department (projected). Lead and Zinc Summary The near-term outlook for lead and zinc prices is cautiously optimistic. Market balances for lead and zinc should improve over the next one to three years, due to economic recovery in key industrial countries, mine and smelter production cutbacks, and a probable downturn in net exports from transitional economies. However, the price recovery will be dampened by a large stock overhang. * Price forecasts for the long term are set at levels judged to be sufficient to bring on most of the new projects currently envisaged for the 1990s. In today's competitive world, new projects tend to bunch within narrow cost ranges and compare favorably with existing mines. * World demand for lead and zinc is projected to grow at an average annual rate of 1.5- 2.0% over the 1992-2005 period. Potential new lead and zinc mine projects are numerous and should be sufficient to meet demand increases in the 1990s and beyond. Lead Prices, a/ 1950-2005 (Wion) Omtrur199DStY 2aD 0 1BD 19 190 1965 190 1975 19B0 1995 l99 1995 2IX 205 af LE sMt Win 9O/h bf Ealedy1G5MN1ncr 171 Zinc Prices, at 1950-2005 3500 3MO 20 SS Ctrm at1e 1E 15 1980 1M 1970 1975 1980 198 199 1995 2I) 2I5 af LNENyqedalNgh gade b DIedtyG5MVird3. Demand Outlook General slowdown in the demand for lead. The market economies' lead consumption peaked in 1989 and declined during the following three years; the cumulative decline between 1989 and 1992 was 122,000 tons, or 2.7%. A further 0.8% decline is anticipated for 1993. In the case of zinc, there has been a net increase of 150,000 tons or 2.9% between 1989 and 1992. However, year-to-year changes have been erratic in that demand declined in 1989, a non-recession year, and increased strongly in recessionary 1991. Preliminary 1993 estimates show an increase of 1.4% in 1993. From the global point of view, the most drastic changes in demand took place in transitional economies. Between 1989 and 1992, lead metal consumption declined by 258,000 tons (or 27%) in transitional economies, and by 350,000 tons (or 23.4%) for zinc metal I China experienced rapid increases in zinc consumption (by 160,000 tons or 41%) during this period, which was more than offset by a 46.7% drop in zinc consumption in the FSU and Eastern Europe over the period. Developing countries have shown contrasting trends in lead and zinc consumption. East Asian developing countries--the Republic of Korea, Taiwan, China, and Thailand-achieved significant growth in lead and zinc consumption, but these were offset by declines in Latin America and former Yugoslavia. I The former East Germany consumed 56,000 tons of lead and 46.000 tons of zinc in 1990, the last year these figures were included in non-market economies' total. Thus, the changes noted above are overstated for market and non-market economies. 172 The decline in lead consumption since 1989 took place in non-battery uses of lead--cable sheathing, rolled and extruded products, alloys, gasoline additive, and pigments and other compounds. Except for use as gasoline additive, the other non-battery uses of lead enjoyed significant increases or held steady during the 1986-89 period. However, except for the shotlammunition use, lead demand has fallen since 1989 for non-battery uses. These end-uses are related to industrial and construction activities. Therefore, lead consumption for non-battery uses is expected to recover once industrial and construction sectors begin to strengthen. Batteries have been the most important end-use for lead, and its level as well as its share in total lead consumption has been increasing steadily over the 1986-92 period. In the five- year period 1987-92, lead consumption for batteries increased by 2.4% p.a. However, the growth during 1990-92 averaged only 0.9% p.a. This slowdown resulted from generally adverse conditions in both replacement and original equipment markets. In 1991, almost all major industrial countries experienced a downturn in automobile production. In 1992, the Republic of Korea and the United States enjoyed robust growth in automobile production, while Europe and Japan suffered huge losses. However, US replacement battery demand declined by 1.9% in 1992 due to a mild winter. Large US stocks of batteries, particularly replacement batteries, also put a damper on production of new batteries. Sharp declines in automobile production in Europe and Japan were a major factor in depressing lead demand in recent years. Unlike the United States and Western Europe, a relatively large proportion (39%) of Japanese lead consumption for batteries goes to original equipment batteries. Japan's battery production declined by 6.1% in 1992 due to weaknesses in both original equipment and replacement battery consumption. Demand for zinc holds steady. Nearly half of zinc metal output is used for galvanizing steel products. Galvanizing also provided the main growth market for zinc, increasing at 3.2% p.a. during the 1987-92 period. The fact that this particular use of zinc enjoyed demand growth of 4.2% in 1991 and 3.6% in 1992 in major industrial and developing countries attests to the underlying strength in demand. This strength in demand derives from quality competition that requires better corrosion protection in various products, such as automobiles and other durable equipment. According to recent International Lead and Zinc Study Group (ILZSG) statistics, in a sample of seven industrial countries plus Brazil, the share of galvanized or coated sheet in total shipments of sheet increased from 19.8% in 1980 to 28.4% in 1991. On the other hand, consumption of zinc per ton of galvanized or coated sheet decreased from 41.3kg in 1980 to 32.3kg in 1991. This decline has been achieved through progressively thinner coatings of zinc (switching from hot dipping to electrolytic coating) and the use of zinc alloys (e.g., Galvalume and Galfan) instead of zinc alone. Had the share of galvanized or coated sheet not increased, zinc consumption for galvanizing would not have increased during the 1980-91 period due to declines in zinc intensity of galvanized or coated sheet. The non-galvanizing uses of zinc have been holding steady or increasing slightly during the 1986-92 period. Zinc-base alloys have been losing markets (automobiles and other industrial applications) to engineering plastics, but the trend appears to have stabilized in recent years. Tests have shown that zinc alloys have better performance characteristics than plastics. 173 Other uses of zinc-brass and bronze, zinc semi-manufactures, chemicals, and zinc dust/powder-- showed a mild upward trend during 1986-90, but have since been adversely affected by the recession. Outlook promising for both lead and zinc. The near-term outlook for lead and zinc demand looks promising as a result of the expectation that Japan and Western Europe will recover from the protracted recession of 1991-93, while the US economy will continue to grow at a moderate rate. Lead and zinc demand by the automobile sector (lead for original equipment batteries, galvanizing demand for zinc, and zinc alloys) should recover somewhat in Japan and Europe as domestic consumer demand for automobiles picks up again. However, exports of automobiles from these countries are likely to suffer from exchange rate adjustments and the resurgence of US automakers. With replacement battery stocks low in industrial countries, lead demand by replacement battery manufacturers should also increase. The automobile sector of East Asia's developing countries continues to enjoy rapid growth. In addition, non-automotive uses of lead and zinc in industrial and developing countries should also register some increases. The latest ILZSG survey expects 3.1% and 2.7% increases in 1994 in the market economies' lead and zinc consumption, respectively. However, these expectations seem to be on the optimistic side, given that economic recovery is likely to be mild at best. We expect demand growth of 1.5- 2.0% p.a. over the period 1994-95 for both lead and zinc. Over the long term, we expect lead and zinc demand to grow at 1.5-2.0% p.a., under the assumption that the world economy will grow at about 3.0% p.a. and related technological and environmental conditions do not change appreciably. There are significant movements to restrict the use of lead on environmental grounds. Research and development to improve battery performances in various applications have made significant progress, but its implication for lead demand will not become clear for a number of years. Zinc has better long- term demand prospects than lead on both environmental and technological grounds. Supply Outlook Supply has dropped in response to low prices. The most visible casualty of low prices has been !%arp declines in mine production of lead and zinc. The market economies' production of lead and zinc concentrates during the first eight months of 1993 declined by 9.0% and 8.4% respectively, from the same period of 1992. Preliminary ILZSG estimates show that for 1993 the decline will total 13.7% for lead and 11.3% for zinc. Most of the declines took place in the large metal-producing countries-Australia, Canada, Mexico, Peru, and the United States. Production of refined lead and zinc metals, however, changed little over the same period. The result has been a drawdown of concentrate stocks to lower levels, particularly for lead. So far this year, smelting and refining charges remained relatively high and the supply impact of low metals prices fell mostly on concentrate producers. Smelters and refiners had little incentive to scale down operations, although the industry-wide view was that smelter capacities needed to be trimmed to support prices. This situation will change as concentrate shortages intensify. Smelting and refining charges will come under downward pressure, and marginal smelters and refiners will 174 come under increasing pressr re to reduce or shut down operations. This implies reduced supplies of refined lead and zinc over the near term. A further consequence of lower smelting and refining charges is that toll smelting of Western concentrates in the FSU will no longer make economic sense. FSU imports of lead and zinc concentrates in 1992 amounted to 70,000 and 110,000 tons, respectively, most of which was re-exported in the form of refined metal. FSU exports from domestic primary production are also expected to level off and start to decline in the near term. The transition to a market- oriented system will raise input prices for lead and zinc producers and terminate operation of marginal units. ILZSG estimates that China produced 317,000 tons of zinc in 1992 and exported 80,000 tons, while the Democratic People's Republic of Korea produced 110,000 tons and exported 80,000 tons. China's exports are likely to decline from 1995 as domestic demand rapidly catches up with capacity. Low prices have impacted on the economics of secondary lead and zinc production. Collection and smelting of scrap lead batteries are being hampered by low lead prices. In the United States, the recovery rate of lead from used batteries dropped from 97.8% in 1990 to 96.8% in 1991. Many new mines expected to open by 1995. Relatively high lead and zinc prices during 1988-91 led to a number of capacity expansion projects. New mine capacities that are expected to come on stream during 1993-95 amount to 76,000 tons for lead and 328,000 tons for zinc. Smelter capacity expansions during the same period will more than match the mine capacity additions. Between 1995 and 2000, a total of 87,000 tons of lead mine capacity and 482,000 tons of zinc mine capacity are known to be in various stages of preparation. Smelter projects in a similar status for the same period fall short of mine capacity additions. This is not surprising because smelter projects require shorter lead times than mine projects. In addition, there are a number of mining and smelter projects undergoing feasibility studies. Capacity additions will mostly take place in Canada, Australia, Latin America, and East Asia. Over the long term, there are many sources of lead and zinc resources that could be developed at reasonable cost Table 1 shows estimates of lead and zinc production costs for major producers. About 90% of world production has total production costs lower than or equal to that of the highest-cost producer shown in Table 1. The average cost is the weighted average cost of all producers, including those not shown in Table 1. There were significant increases in production costs during the 1988-90 period, due to exchange rate adjustments (US dollar depreciation), inceases in treatment charges, and declines in by-product credits. Costs started to decline in 1991, and the downward trend is expected to continue for several years. Brook Hunt Associates estimate that the average cost of production will continue to decline through 1995, reaching 025.2/lb for lead and t48.5/1b for zinc by 1995. Much of the cost savings will be achieved through the factors mentioned above. 175 Table 1: Average Production Costs for Major Lead and Zinc Producers (g/Ib) Cash Operating Costs Total Production Costs 1988 1989 1990 1991 1988 1989 1990 1991 Lead Mexico 14.7 14.8 21.3 20.9 17.9 18.2 26.4 25.4 United States 16.9 15.9 214 19.9 22.0 21.3 26.7 24.3 Australia 20.3 19.2 24.6 21.3 23.8 22.4 28.9 24.9 Peru 18.5 20.0 26.5 21.8 24.6 24.3 32.6 26.7 Canada 23.8 25.5 28.3 24.1 25.6 27.2 31.6 26.7 Ireland 22.8 20.3 25.2 22.0 25.8 22.1 28.3 24.2 Average 20.7 19.8 25.1 22.8 24.3 23.3 29.6 26.7 Zinc Thailand 23.4 28.5 32.4 34.1 31.3 32.9 37.0 38.5 Brazil 34.6 37.1 33.2 33.6 36.3 40.3 37.6 38.4 Mexico 35.5 44.0 43.6 39.6 38.3 50.8 54.6 47.7 Canada 40.1 51.2 48.2 45.2 44.9 57.5 55.3 51.8 Australia 41.4 51.4 47.1 4i.3 45.8 58.1 53.9 48.1 Peru 37.0 49.6 47.7 43.4 47.2 59.5 58.8 53.0 Spain 44.0 53.7 57.5 51.7 52.6 62.6 68.0 59.8 Average 41.0 50.8 48.4 44.8 46.7 57.8 56.2 52.5 Source: Brook Hunt & Associates, Lead and Zinc Mines Cost Study, 1992 edition. Price Outlook Transidonal economies are the key to future demand levels. A major cause of the downturn in lead and zinc prices in recent years has been the large volume of net exports from the transitional economies. Between 1990 and the first half of 1993, net exports of lead and zinc metals from the transitional economies almost equaled the increase in reported stocks in the market economies. China, the FSU, the Democratic People's Republic of Korea, and Poland have been the main contributors to the increase. As late as 1989, the transitional economies had been net importers of lead and zinc. These countries became net exporters in 1990 as domestic demand collapsed in Eastern Europe and the FSU, and China's production increased faster than domestic needs. Even after allowing for toll smelting of Western concentrates in the FSU, net exports from the transitional economies clearly played a pivotal role in boosting stocks in the market economies to record-high levels. For the near term, net exports from the transitional economies will continue to be an important factor affecting the market balance. A great deal of uncertainty prevails over the future of the FSU economy and its lead and zinc sector. However, there are reasons to expect that the transitional economies' net exports will decline in the years ahead, if not immediately. First, inefficient mines and smelters in the FSU and Eastern Europe may close down as the 176 economies move closer to market-based pricing of inputs. Second, declines in domestic demand may soon bottom out in the FSU, as it appears to have done in Poland. Third, China's consumption growth will gradually catch up with capacity. Fourth, toll smelting in the FSU is expected to decline sharply. Lead outlook is moderately good; zinc is not expected to do as well. According to a recent ILZSG assessment, in 1994 the market economies are expected to show surpluses (of supplies over demand) in lead and zinc of 1.4% and 5.9%, respectively. However, the forecasts appear to be too optimistic on both production and consumption. There is a strong possibility that individual country forecasts of production failed to take full account of reduced concentrate supplies. When reduced concentrate supplies are factored into the balance, the market balance for lead and zinc should improve more and faster than the ILZSG forecasts. It appears that the lead market has a good chance of showing a deficit in 1994. However, even if the supply and demand balance for lead turns into a deficit, it will take a year or so to bring stocks down to a normal level. At the end of the first half of 1993, lead stocks stood at 7.8 weeks consumption, compared with 4.6 weeks consumption at the end of 1990. The stock situation is worse for zinc than lead. Zinc stocks stood at 11.6 weeks' consumption at the end of the first half of 1993. It may take one to two years longer for the zinc market to show a deficit than for lead. Thus, the outlook is rather gloomy for the zinc market for 1994-95. For the long term, modest but steady increases in lead and zinc demand will require expansion of mine and smelter capacities. To enable such investments, lead and zinc prices have to reflect closely the total costs of production for the new capacity projects. In today's competitive environment, new projects are not entertained, unless they have highly competitive cost characteristics compared with existing mines and smelters. For example, the large McArthur River project in Australia will produce lead and zinc at total costs of $5511ton and $1,058/ton, respectively. The corresponding cash costs are estimated at $485/ton and $904/ton, respectively. This new project ranks in about the middle of the cost hierarchy of all operating mines anticipated for 1995. Of 19 greenfield projects analyzed by the Brook Hunt Associates, Spain's Los Frailes project is at the higher end of the cost scale in terms of both cash and total costs. Total production costs of the project are estimated at $573/ton for lead and $1,147/ton for zinc. Thus, investments in capacities will be adequately forthcoming if prices average over the longer term, as projected, no less than $570/ton for lead and $1,150/ton for zinc in constant 1990 dollars. Actual prices. however, will fluctuate widely around these expected averages. 177 Table Al: Lead - Prces. l 1950-93 (Actual) and1994-2005 (Prolected) -- lS/toni Current 1990 ~Constant $-- G-5 MU W- CP1 c/ 1950 293 1.794 2.363 1951 446 2.369 3.246 1952 372 1.885 2.596 1953 252 1.314 1.744 1954 265 1.413 1.806 1955 292 1.527 1.984 1956 321 1.621 2.134 1957 266 1.316 1.731 1958 201 978 1.284 1959 195 962 1.248 1960 198 957 1.243 1961 176 836 1.080 1962 154 717 919 1963 174 826 1.006 1964 278 1.297 1.566 1965 318 1,473 1.736 1966 262 1.172 1.383 1967 229 1,013 1.179 1968 240 1.072 1.202 1969 289 1.225 1.387 1970 304 1212 1.375 1971 254 961 1.076 1972 302 1.048 1.160 1973 430 1289 1.445 1974 593 1.458 1.799 1975 417 923 1.126 1976 445 971 1.163 1977 617 1.226 1.459 1978 661 1.141 1.276 1979 1,208 1.841 2.203 1980 906 1.259 1.477 1981 727 1.006 1.176 1982 546 767 894 1983 425 611 685 1984 443 651 716 1985 391 570 620 1986 406 502 533 1987 595 671 693 1988 656 688 708 1989 673 711 730 1990 811 811 811 1991 558 546 531 1992 541 507 488 1993 406 379 359 1994 500 451 429 1995 550 482 461 1996 580 494 472 2000 800 614 584 2005 B20 558 530 a/ Soft pi, refned. 99.97% pb. London Metal Excehanq. b Deflated by G-5 Manufactd Unit Vau (MUV) Index. c/ Defated by G-7 Consumer Price index (CM). Soum Enotneedna and Minin Journal. Metaesullschaf~. Mal Statistics. and Mtts Wek (actua: Wod Bank, International Economics Deartment (prolected). 178 Table A2: Zinc -Prices. a/ 1950-93 (Actual) and 1994-2005 (Projected) Current S ---- 1990 Constant $ G-5 MUV bf G-7 CPI et Actual 1950 328 2.009 2.645 1951 473 2.512 3.443 1952 412 2A088 2.875 1953 207 1.079 1.433 1954 216 1.151 1.472 1955 250 1.308 1.698 1956 269 1.359 1.789 1957 225 1.113 1.464 195B 182 a85 1.162 1959 226 1.115 1.446 1960 247 1.193 1.551 1961 214 1.017 1.313 1962 185 861 1.104 1963 212 1.006 1.225 1964 324 1.512 1.825 1965 311 1.440 1.698 1966 282 1,262 1.489 1967 273 1.207 1.405 1968 262 1.170 1312 1969 287 1.216 1.377 1970 295 1.176 1.334 1971 309 1.169 1.309 1972 377 1.309 1.448 1973 851 2.550 2.860 1974 1.239 3.047 3.759 1975 743 1.644 2,006 1976 712 1.554 1.861 1977 591 1.174 1.397 1978 59 1.023 1.144 1979 742 1.131 1.353 1980 761 1.057 1241 1981 846 1.171 1.36B 1982 745 1.047 1.221 1983 764 1.099 1.233 1984 922 1.355 1.491 1985 783 1.141 1.241 1986 754 932 990 1987 799 899 929 1988 1,242 1.303 1.341 1989 1.659 1.753 1.800 1990 1.513 1.513 1,513 1991 1.117 1,093 1,063 1992 1.240 1,163 1,119 1993 952 898 851 1994 1.030 920 885 1995 1.100 965 921 1996 1.200 1.021 977 2000 1.550 1.190 1.132 2005 1.600 1.090 1,033 aW London Metal Exchange. For years up to 1984. Good Ordirary Brand, or standard grade for zinc content of 98% or better 1985-89. high grade. minimum 99.95% n from 1990 onward. special high grade. minimum 99.995% zn. Di Dellated by G-5 Manufacturino Unit Value (MUV) Index. c Deflated by G-7 Consumer Price Index (CPI. Source: Enaineerin and Mining Journal. Metallesellechaft. Metal Statistics. and Metals Week (actual): World Bank. International Economics Department (rolected). 179 Gold Summary * Over the near term to 1995, gold prices are expected to range between $400-420/oz as supply shortfalls persist and inflation and interest rates edge up slightly in the industrial economies. Gold prices are forecast in the range of $370-390/oz (in constant 1990 dollars) over the long term (2000-2005), on the basis of the assumption that inflation and interest rates will remain relatively low, supply and demand balance for gold will be restored by 2005, and gold production costs will not change significantly. * Jewellery fabrication demand in market economies approximately doubled during the past five years (1987-92) of low gold prices. As long as gold prices remain relatively low, fabrication demand for jewellery can be expected to continue to enjoy robust growth. * Exploration expenditures in market economies, which peaked in 1988, declined 60% over the 1988-92 period. The decline portends a sharply lower growth rate of mine production in the years ahead than in the 1980s. In 1992, about 92% of the market economies' mine capacities had cash costs of less than $350/oz and 95% had total costs of less than $420/oz. Thus, at projected gold prices, most new mines should have adequate rates of return. Gold Prices, a/ 1963-2005 8,1 Omstr 199D$ts 4D' 0 19MB 1968 1973 1978 19M3 19m l9M 199 2003 a/ 99.5%, fine, Irrxn, average dadly final zate. b/ Del ated by G-5 lN Irdex. 180 Demand Outlook Gold has long been desired as a store of value as well as for its aesthetic and practical uses. The demand for gold, defined as the quantity that agents wish to purchase for any reason, broadly consists of fabrication demand and investment demand. The former relates primarily to its physical qualities, and the latter to its role as a store of value. However, a large part of what is called fabrication demand (jewellery and coinage) serves the dual purpose of a consumption good and an investment asset. This is particularly true in developing countries where trading in old gold jewellery is common. Available data on the demand for gold only show the fabrication demand by different uses and the net change in gold holdings by the private and public agents. In 1992, the fabrication demand in the market economies amounted to 2,859 tons. Comparable figures for investment demand are not available. In any given period (e.g., a month or a year), there may be a net investment or disinvestment, as defined by changes in stock holdings. Historical data show that net investments are small relative to fabrication demand. Its size, however, cannot be taken as a measure of investment demand because price has changed to equilibrate supply and demand for gold, including investment demand. It is believed that the investment demand is the dominant factor in determining gold prices. The demand for gold jewellery continues to rise. Jewellery is the major compor-nt of fabrication demand, accounting for 86% of total fabrication demand in 1992. It has also been the fastest growing, rising by 12.5% p.a. in the market economies during the period from 1983 to 1992. In particular, jewellery fabrication demand in the market economies approximately doubled during the five years from 1987 to 1992 when gold prices were relatively low. The demand for gold jewellery is highly sensitive to the gold price. As long as gold prices remain low, fabrication demand for jewellery can be expected to continue its robust growth. From 1983 to 1992, jewelery fabrication demand for gold increased by 8.3% p.a. in the industrial countries, and by 16.2% p.a. in the developing countries. The developing countries are now larger consumers of gold for jewellery fabrication than the industrial countries. In many developing countries, gold jewellery is considered a form of saving. Its manufacture tends to have much less skill and other value-added content than in the industrial countries. Among the developing countries, growth in gold jewellery has been most rapid in East Asia and the Middle East. Demand increased by nearly ten-fold in Hong Kong, Taiwan, China, and the Republic of Korea over the 1983-92 period. Deregulation of the gold market in India helped boost the country's demand for gold jewellery. Many developing countries impose restrictions on gold imports and their domestic prices tend to be substantially higher than in international markets. The gradual relaxation of the restrictions, as in the case of India, will help sustain or increase the high demand growth in those countries. Demand for gold in China is the key to that region's demand growth. China has emerged as one of the world's largest consumer of gold, with demand estimated at as much as 350 tons in 1992. Chinese consumers are setting aside a significant part of their increased income in chuk kam ("pure gold") jewellery, as a hedge against relatively high domestic inflation. Despite official restrictions, gold in various forms is finding its way into China from Hong Kong, 181 Malaysia, and Taiwan, China. In fact, a large part of the growth in fabrication demand in these countries is believed to have been stimulated by Chinese demand. Other uses for gold show less growth potentiaL Among other fabrication uses of gold, demand for electronics and other industrial and decorative uses showed significant growth over the 1983-92 period, while its use in dentistry, medals, and coins remained stagnant or declined. Gold is used in computers, mainly in mainframes rather than in personal computers. The use of gold in electronics fell by 7.1% in 1992, after increasing steadily at 4.4% p.a. from 1983 to 1991. The downturn in 1992 resulted from declines in worldwide computer sales, especially in Japan and for mainframes in particular, as well as for consumer electronics, and lower military spending. Despite an increasing and aging population, the growth of gold use in dentistry has been restrained by the development of substitute materials and cost containment efforts by medical insurers. The fabrication demand for gold coins and medals is not much different from investment demand. It appears that bullion coins are running out of favor among investors. A more popular form of investment is bullion bars. The market economy countries outside Europe and North Amrica were net hoarders of bullion bars during the entire 1983-92 period. Net hoarding by these countries amounted to more than 200 tons per year, even during the past three years of low gold prices. Countries in South and East Asia and the Middle East have been net hoarders, while Latin America became a dishoarder in recent years. The net hoarding by these countries played an important role in absorbing large disinvestments in 1992 by the official sector. Gol4 a bad investment for many yeam. Investment demand for gold is determined by investors' portfolio choice that yields the optimal risk and return combination. Traditionally, gold has been viewed as a sate asset in the sense that it retains some constant inherent value. Investors buy gold when the expected risks of other assets increase or their expected returns decrease relative to gold. Liquid assets compete most directly with gold. Whenever the exchange value of money becomes unstable because of inflation or exchange rate pressures, the investment demand for gold increases. Since 1968 when gold was demonetized, gold prices rose to high levels twice, both in the wake of oil price shocks and subsequent bouts of inflation. The firanian Revolution and the Soviet invasion of Afghanistan added to the uncertainties around the time of the second oil price shock. The temporary upsurge in gold prices in 1987-88 was related to the October 1987 stock market crash and depreciation of the US dollar (the Plaza Agreement). In terms of German and Japanese currencies, the increases in gold prices in 1987-88 were hardly noticeable. Since 1983, gold prices have been following a generally downward trend. This reflects a more stable economic and political environment over the years from 1983 to 1992 than in the preceding ten years. For the past ten years, gold has been a bad investment. 182 Supply Outlook From 1983 to 1992, world mine production of gold increased by 4.9% p.a. An interesting feature of this impressive growth is that it was achieved by production increases in countries other than South Africa and the FSU. In 1983, South Africa and the FSU were the world's two largest producers of gold, accounting for 65.5% of world production. However, their share of world production declined to 38.4% by 1992. On the other hand, production more than doubled over this period in Australia, Canada, Ghana, Indonesia, Papua New Guinea and the United States. Gold mine production also increased significantly in virtually all other gold- producing regions, including Latin America, China, and some countries in Africa and Asia. Low prices and fewer tax incentives have led to a slowdown in exploration. The phenomenal growth in gold production followed in the aftermath of high gold prices in 1979-80. Significant increases in exploration and development expenditures and application of new mining techniques have contributed to the production increases. However, the past several years of low gold prices have adversely affected exploration and development expenditures. Expenditures in the market economies peaked in 1988 and declined by 60% over the 1988-92 period. Removals of tax incentives in Australia and Canada partly contributed to the decline. The result has been a substantial slowdown in the growth of proven and probable reserves. In recent years, exploration investnr-its have shifted from established large gold-producing countries to the developing countries, particularly in Latin America where measures have been taken to open up and liberalize the mining industry. There is also a growing interest in the FSU. These shifts will mitigate the effects of declining exploration expenditures. However, the sharpness of the decline in exploration expenditures undoubtedly will be felt in the years ahead--in the form of slower growth in mine production than in the 1980s. SOUTH AFRICA managed to increase mine production by 2% in 1992, despite wide predictions to the contrary. Recent devaluation of the rand and various cost-cutting measures have benefitted South Africa's gold producers. As a result, they are now in a better financial position to make investments in mine capacity maintenance and expansion. UNrfFD STATEs has achieved tremendous increases in gold production, with mine production increasing more than five-fold over the 1983-92 period. The increase was due to the application of new technology (heap leaching) on low-grade ore that was otherwise uneconomic. Mine production increased by almost 10% in 1992, as expansions continued at existing and new mines. Unlike other major gold-producing countries, exploration expenditures also continued unabated. However, low gold prices are making it increasingly difficult to finance development of new mines. In AUSTRAuA, mine production increased almost eight-fold during the 1983-92 period, but growth virtually has halted since 1990. Mine production managed to increase slightly in 1992. This was contrary to earlier expectations of a decline, as mines which were expected to close remained open, partly helped by depreciation of the Australian dollar. Despite low gold 183 prices and the newly imposed corporate tax on gold mining, exploration efforts have turned up several world-class deposits. CANADA suffered a II% decline in mine production in 1992, the first reduction in more than a decade. This resulted from closures of high-cost marginal mines and production declines in operating mines where gold is often produced as ajoint product. In the past few years. LATIN AMERICA has received increasing attention as the promising area for the development of new mines for gold and base metals. There have been significant increases in exploration expenditures in Chile and Mexico, and exploration interest has recently spread to Peru and Argentina. There are also a number of promising prospects in Brazil, Colombia, Venezuela, Bolivia, Ecuador, and other countries. Increased exploration expenditures have not resulted in any major new discoveries. However, a large part of future production increases are expected to be in Latin America. Other developing countries that promise significant production increases include Papua New Guinea. Indonesia, and Ghana. Since peaking in 1989 at 285 tons, gold production in the FSU has steadily declined to an estimated 237 tons in 1992. Despite its importance as an earner of hard currency, the sector continues to suffer from the lack of investment and clear authority regarding ownership and cor-ol. Most of the FSU's gold mines are in Russia. Ironically, the States that are more characteristic of the old regime, Uzbekistan and Kazakhstan, are more successful in attracting foreign investments. Once the political and economic problems are sorted out, gold production should increase once again and will become an important vehicle for financing FSU's development needs. Gold production remains profitable despite low prices. Despite low gold prices, the majority of the world's gold producers were profitable in 1992. Brook Hunt Associates estimate that the cash cost of gold mines in the market economies averaged $257/oz in 1992, and total costs averaged $313/oz. Furthermore, about 92% of its mine capacity had cash costs of less than $350/oz, and 95% had total costs of less than $420/oz. At recent market prices of around $390/oz, most gold mines should be profitable and most of the prospective new mine projects should have adequate rates of return. New projects will be discouraged if prices drop to the low $300s, as it has in the recent past. Costs are not expected to increase dramatically in the near future. In the past two decades, the average cost of producing gold has moved closely with gold prices. Costs increased sharply in the early 1980s, fell in the mid-1980s, and have since remained relatively steady. However, there have been wide disparities between major gold-producing countries. South Africa's production costs have risen sharply since the mid-1980s to levels higher than in the early 1980s. The cost increases mainly resulted from deterioration of ore grade, progressively difficult mining conditions, and escalation of wage rates. In less than a decade, South Africa's position has changed from a low-cost producer to a high-cost producer. The opposite has been the case for the United States. With the introduction of heap leaching of low-grade ore in combination with traditional milling, US costs have declined more than any other major producer 184 to become the world's lowest-cost producer of gold. Application of this same technology in other countries (e.g., Australia and Canada) has not been as successful as in the United States because of differences in geological characteristics and climatic conditions. In due course, it is to be expected that the technology will adapt to local conditions and contribute to reducing costs. The average cost of producing gold is expected to remain largely unchanged over the forecast period, as cost-saving innovations make up for gradual deterioration in ore grade and mining conditions. Most of the secondary supplies of gold come from the sale of old jewellery. There are generally three main reasons for selling old jewellery: to exchange for other jewellery, to meet emergency cash needs, or to take advantage of high gold prices. The first of these reasons help to explain the increases in secondary supplies in Saudi Arabia and India, while the second may apply to the FSU and Iraq. Secondary supplies, particularly for the third reason, are quite sensitive to gold prices. Recovery of gold from electronic scrap has been declining steadily, because miniaturization of electronics has reduced the gold content so much that its recovery is not economical at today's low prices. Price Outlook After falling to less than $330/oz in the first quarter of 1993, gold prices recovered briefly to exceed $400/oz in July. However, prices fell to average $355/oz in September, but then increased to $380/oz in December. The fluctuations in 1993 seem to suggest renewed volatility in gold prices, after trading within the narrow range of $330-370/oz during the preceding two years. The upsurge in gold prices in 1993 is attributed to the expectation that inflation and interest rates may have bottomed out and could rise with economic recovery. Repeated runs on some European currencies and the apparent fragility of the European Exchange Rate Mechanism made gold a safe refuge. With the US equity market at record-high levels, there has also been renewed investor interest in gold (and other base metals) as a way of diversifying away from equities. Supply and demand are expected to balance by 2005. Table 1 presents recent developments and forecasts of the world supply and demand balance for gold and changes in above-ground stocks. Supply is defined as the sum of market economies' mine production and secondary production, and net exports from transitional economies. Demand consists only of market economies' fabrication demand. The difference between the two measures should equal the net change in official and private gold holdings. Prior to 1989, supply exceeded demand. However, since the early 1980s, demand has been increasing much faster than supply, with supply equaling demand around 1989. In 1992, demand exceeded supply by a large margin. Over the forecast period, demand growth is expected to decelerate more rapidly than supply as prices rise; therefore the supply shortfall is expected to narrow. Supply and demand are expected to be in a more balanced position by the year 2005. 185 Table 1: World Supply and Demand for Gold, 1985-7005 (tons) Mine Secondury Net Sale Total Fabrication Demand Total Balance OlTiclal Private Production Production Tran, Econ. Supply Industrial Developing Demand Reserves Holdings 1985 1,239.0 319.0 210.0 1,768.0 890.0 666.0 1,556.0 212.0 132.0 80.0 1986 1,300.0 492.0 402.0 2.194.0 1,122.0 649.0 1,771.0 423.0 145.0 278.0 1987 1.387.0 434.0 303.0 2124.0 984.0 689.0 1.673.0 451.0 72.0 379.0 1988 1.552.0 353.0 263.0 2,168.0 1.014.0 924.0 1,938.0 230.0 285.0 -55.0 1989 1.682.0 363.0 266.0 2,311.0 1,161.0 1.163.0 2,324.0 -13.0 -366.0 353.0 1990 1,746.0 493.0 412.0 2.651.0 1,226.0 1,228.0 2,454.0 197.0 -7.0 204.0 1991 1.775.0 407.0 222.0 2,404.0 1,268.0 1.303.0 2,571.0 -167.0 -58.0 -109.0 1992 1.841.0 435.0 66.0 2,342.0 1,258.0 1.601.0 2,859.0 -517.0 -599.0 82.0 1993 1.878.0 500.0 140.0 2,518.0 1,169.9 1.521.0 2,690.9 -172.9 -500.0 327.1 1994 1.925.0 520.0 100.0 2.545.0 1,146.5 1,551.4 2,697.9 -152.9 -400.0 247.1 1995 1,970.0 540.0 100.0 2,610.0 1,158.0 1,582.4 2.740.4 -130.4 -300.0 169.6 2000 2.172.0 670.0 150.0 2992.0 1,229.2 1.879.4 3.108.6 -116.6 -250.0 133.4 2005 2.375.0 800.0 300.0 3.475.0 1,291.9 2,178.7 3,470.6 4.4 -250.0 254.4 * Increases (+), decreases (-). Source: Gold Fields. Mineral Services, Ltd., Gold 1993 (historical). World Bank. International Economics Department (projected). Net exports of gold from transitional economies have been an important factor affecting international gold prices. In the second half of the 1980s, sharp increases in FSU exports were a major contributor to the excess supplies. In 1992, declines in FSU mine production and increases in China's demand reduced net exports to only 66 tons, down from 222 tons in 1991. Although this decline made the supply shortfall larger, it was no longer large enough to greatly affect the market balance. We expect net exports from the transitional economies to recover gradually in the long term, as increases in FSU production are partly offset by higher import demand from China. Two consecutive years (1991-92) of large supply shortfalls would normally have meant substantial price increases if it were not for the existence of the huge above-ground stocks of gold. Depending on the size of investment demand, a supply and demand imbalance for gold can be easily rectified by stock accumulation or drawdown. For example, the 1992 shortfall was more than made up by net sales from official reserves, notably by Netherlands, Belgium, and Canda. 186 Since the proportion of gold used in hard-to-recover form is small, total stocks always increase roughly by the amount of mine production.' The above-ground stocks, measured by cumulative mine production, is estimated at 121,500 tons in 1992, roughly ten times the estimated proven and probable under-ground reserves.2 Of this total, 50,000 tons are in the form of old jewellery, 16,000 tons in private sector bullion holdings, and 36,000 tons in official reserves. The rest is in coins and other fabricated products. Use of gold as a reserve asset declining in industrial countries. Over the past 25 years, the level of market economies' official reserves (including IMF holdings) declined slowly but steadily, by about 2,000 tons. Most industrial countries have lessened the role of gold as a reserve asset, as liquidity became increasingly important with increasing sophistication of asset management tools. On the other hand, developing countries (mostly in Asia) have been increasing official gold reserves, absorbing much of the net selling by the industrial countries. This was done partly as a way of managing balance-of-payments surpluses. It is assumed that global official reserves will continue slow but steady declines and its impact on gold prices is expected to be relatively minor. Changes in private sector bullion holdings the key to future price levels. Increases in above-ground stocks over the past 25 years were almost entirely in private hands-in the form of jewellery (39,000 tons) and private sector bullion holdings (more than 5,000 tons). Changes in this part of stocks have the most effect on gold prices. During the 1980-92 period, the private sectors in North America and Western Europe were more often net sellers of gold bullion than net buyers, while the rest of the world were net buyers. The difference in investor behavior between the two groups is partly explained by the fact that the former is dominated by large well-diversified institutional investors looking for higher returns, while the latter group largely consists of security-minded small investors. Investment demand for gold in developing countries is likely to increase for much of the forecast period. Inflationary e-cpectations and gold prices closely linked. The outlook for the investment demand and hence for gold prices depends on world economic and political developments and the way the public and private holders of gold react to those developments. In this report, we focus on the relationship between gold prices and inflationary expectations. Figure I shows the relationship between the London Inteibank Offer Rate (LIBOR) and real gold prices. We use the three-month LIBOR on US dollar deposits. Among observable economic variables, the short-term nominal interest rate is thought to most closely reflect inflationary expectations. The nominal gold price is deflated by the industrial countries' GDP deflator. Figure I shows that real gold prices have moved closely with the LIBOR during the past two decades. The sharp increase in gold prices around the time of the second oil price shock was an exceptional case and is not likely to be repeated. Relatively high gold prices during 1987-88 were due to heightened At the rate of mine production in 1992, the stocks will increase by 1.8 % p.a.. compared with world population growth rate of 1.54 % p.a. and GDP growth rate of 3.0 % p.a. forecast over the 1992-2005 pei-od. Thus, the scarcity value of gold is not likely to change appreciably over the fomzast period. 2 A significant part of the stock will not return to the market, for any reasonable price of gold. Because of under reporting by South Africa. the figure for proven and probable reserves is known to be an underestimate. 187 financial market volatility in the wake of the October 1987 stock market crash. Figure I is only one attempt at explaining gold prices in terms of investment demand. However, the dominant influence of inflationary expectations on gold prices is quite strong. The end of the cold war and the apparent unwillingness of OPEC to impose another oil price shock forebode relatively stable political and economic conditions in the years ahead. The latest World Bank forecasts assume 2.9% inflation in G-7 consumer price index (CPI) and 5.7% six-month LIBOR for the 1993-2002 period. These are low levels compared with 5.5% inflation in G-7 CPI and 8.7% for six-month LIBOR over the 1981-92 period. Over the near term to 1995, gold prices are expected to range between $400-420/oz as supply shortfalls persist and inflation and interest rates edge up slightly with economic recovery in industrial economies. Gold prices are forecast in the range of $370-390/oz (in constant 1990 dollars) over the long term (2000-2005), on the basis of the assumptions that inflation and interest rates will remain relatively low, supply and demand balance for gold will be restored by 2005, and gold production costs will not change significantly. Figure 1: Interest Rate and Gold Price, 1970-92 250 99 ~200 150 ' a125 o - ol-rieIners Rl 101 "0God Pdoe 0-In*AaegF1t 188 Silver Summary * Silver prices recovered strongly in 1993 in the wake of three consecutive years of supply shortfalls. In the near term to 1995, silver is expected to trade within the $5.00-5.50/oz price range. Silver prices are expected to rise slightly in real terms until 2000, and decline thereafter. * World fabrication demand for silver increased rapidly during the past seven years of relatively low silver prices. Demand growth has been most impressive in developing countries, and robust growth is expected over the near term. Demand growth is expected to slow over the longer term, as silver prices rise and its uses in films face technological challenges. * World mine production is estimated to have declined by more than 6% in 1993. Mine production is likely to recover moderately in the near term to 1995, and increase by 2.2% p.a. over the longer term. In the next several years, large production increases will come mainly from Australia, Bolivia, Chile, Indonesia, and Mexico. Silver Prices, a/ 1950-2005 Ofttw cz) ZOOD I SOD 1,(I0,OrOt al) - ... .. . 19D 195 196 1965 1970 1975 19B0 1985 199D 1995 2I 20 a' UTrdined(195D1)-ry&Frn, rdiried (19M22005), NYak 1b [iaedAbyGSfJvirIc. 190 Demand Outlook Silver has a variety of industrial applications, as well as the traditional uses in jewellery, silverware, and coinage. Industrial uses include photography (accounting for 45.3% of industrial countries' total consumption in 1992), electronics and batteries (15.2%), chemicals, alloys and solders, catalysts, and mirrors. The demand for silver has been highly variable and is sensitive to economic activity and silver prices. For example, during the 1977-85 period of high silver prices, world consumption of silver declined by 2.6% p.a. Between 1985 and 1992, world demand for silver increased by 5.7% p.a., a rate faster than for any base metal.' Estimates for developing countries show that consumption increased at a very high rate of 13.1% p.a. during the period 1985-92, while for the industrial countries the growth rate was 3.4% p.a. In the industrial countries, jewellery and silverware, photography. and coinage uses accounted for most of the increase, while electronics use remained stagnant. In the developing countries, electronics use was the fastest-growing sector, although demand in other sectors also increased substantially. In 1992, the industrial countries registered a 2.3% decline in silver consumption; it was led by sharp declines in Japan and Europe, while US demand remained flat. Technological innovations challenge the use of silver in photography. The photographic use of silver, which is the largest market for silver, has weathered serious technological challenges during the past decade. First, video cassette recorders took away a significant part of the commercial photography market that accounts for approximately 45% of total photographic use. Eastman Kodak started marketing Photo CDs in 1992, which records and plays back regular pictures in digital form. This introduces a whole new way for storing and retrieving photographic images, with a potential to replace microfiches and similar devices. In November 1993, Xerox introduced VerdeFilm, an electrophotographic system that does not use silver and is potentially useful in graphic arts (22% of photographic use of silver). Silver prices sharply declined in the wake of the announcement but quickly recovered when it became apparent that the technology has only uncertain applicability in graphic arts. The rest of photographic use of silver goes to medical, dental, and industrial x-ray films. With the spread of advanced medical imaging technologies (CAT scans and NMRs), the use of medical x-ray films for storing those images has been increasing rapidly in recent years. Three weeks afi-r the Xerox announcement, Polaroid introduced two enhancements to its Helios laser imaging process that could replace silver-halide x-ray film. Helios is scheduled for clinical testing in 1994 and its costs and reliability compared with x-ray film remain to be seen. These technological advances have the potential to displace a large part of the demand for silver. Demand for silver is up in developing countries. The use of silver in jewellery, sterlingware, and silverplating in industrial countries declined sharply during the early 1980s when silver prices were high, and recovered only partially in recent years despite low silver prices. However, silver demand for this purpose sharply increased in recent years in Hong Kong, India, the Republic of Korea, Taiwan, China, and Thailand. Clearly, the differences suggest low income World defined as market economies only. The totals cover most but not all the silver-consuming countries. 191 elasticity for silver in these uses in high-income countries, and high income elasticity in LMICs. The same pattern by income group also can be observed in electronic and electrical uses of silver, but for a different reason--the shifting of production of electronic and electrical goods from high- income countries to the Asian developing countries. Recently, some developing countries also have started production and processing of photographic films under license from industrial countries. This has led to rapid increases in the chemical and photographic uses of silver. Outlook for silver remains uncertain. The demand for silver will be contingent on the same factors that controlled its growth in the past. Given the assumptions that the world economy will grow at 3.0% p.a., the outlook for silver demand should be moderately promising. However, silver prices could rise over the medium term and substantially dampen the growth of silver demand. Over the near term to 1995, we forecast world silver demand to grow at 3.0-3.5% p.a., helped by economic recovery and relatively modest silver prices. Over the longer term, the growth in silver demand is expected to fluctuate widely as in the past, depending on silver prices, technological developments, and economic conditions. The strong growth during the 1985-92 period was exceptional. Demand growth over the long term is likely to average substantially lower than over the past six years. Silver consumption in developing countries is expected to increase rapidly, projected at 2.8% p.a. over the forecast period. Supply Outlook Mine production of silver often involves the production of other metals (lead and zinc, gold, copper, nickel, and tin), with silver as the main or the minor product. Even when silver is produced as a minor by-product, its price and quantity often play an important role in shaping the economic viability of a particular mine. For example, Mexico's lead and zinc mines may be economic because of their generally high quantity of silver by-product, while Canadian lead and zinc mines may have high costs due to the low silver content of their deposits. The by-product nature of silver production generally make its supplies less responsive to its price than otherwise would be the case. However, silver prices tend to move together with other metals prices. As a result, historical data may appear to show that silver supplies are significantly affected by silver prices. Slow growth perceived for recycled silver. About a quarter of silver supplies come from secondary sources such as used films, old jewellery and silverware, old silver coins, scrapped electronic and electrical equipment, and government disposal. Costs of silver recovery from these sources are generally lower than silver prices. Thus, secondary supplies have not been responsive to silver prices in the recently observed price range. However, it was shown during the early 1980s that secondary silver supplies can increase dramatically at high silver prices. During the 1980-92 period, secondary silver supplies declined by 6.7% p.a. Recently, recovery of silver from electronic and electric equipment has become increasingly difficult due to environmental reasons. Remelting of old silver coins has sharply dwindled because of low silver prices. Over the forecast period, 1992-2005, secondary production is expected to increase at an average rate of 1.0-1.5% p.a., mostly from recovery of silver from photographic scrap. 192 Production of silver declined in 1993. World mine production of silver increased steadily by 2.8% p.a. during the 1980-90 period, but declined by 2.5% in 1991 and another 1.0% in 1992. The bulk of production increases during the past decade took place in Australia, Canada, Chile, China, Indonesia, Mexico, Morocco, Spain, and the United States. World mine production is expected to decline by more than 6% in 1993, due to extremely low prices for silver as well as for most base metals. Preliminary estimates by the International Lead and Zinc Study Group show that the market economies' lead mine production will decline by 13.7% in 1993 compared with 1992 production, and zinc by 11.3%. A significant part of silver is produced jointly with lead and zinc. The production cutbacks will come mostly in Canada and the United States. Low production growth forecast. Mine production is likely to recover only moderately in the near term to 1995, reflecting continued weakness in most base metal markets. In the next several years, large production increases will be limited to Australia, Bolivia, Chile, Indonesia, and Mexico. Beyond 1995, we expect mine production to increase by 2.0% p.a., broadly in line with production forecasts for copper, gold, lead, zinc, and nickel in this report. A number of mining projects for these metals have significant silver components. We do not anticipate any shortage of mining projects to supply the projected demand growth in silver. Available information shows that net exports of silver from the transitional economies have been declining in recent years and probably will continue to decline in the near future. Net exports of silver from the transitional economies are estimated at 5.6 million ounces in 1992, and thus are not a major factor in world markets. However, the situation may change if FSU production deteriorates further and China's imports increase sharply. In recent years, it appears that China's import demand has been moderated by rapid increases in lead and zinc production, and hence increases in its by-product silver. Poland's silver production, which is all a by-product of copper, increased slightly in 1992. However, FSU's silver production fell by 20% in 1992. Price Outlook Silver prices fell to record lows in early 1993, trading as low as $3.5 1/oz in March. From April 1993, they gradually started to recover to nea the $5.00/oz level in December. The price rise can be attributed to an increasing shortfall of newly refined supplies relative to fabrication demands and growing investors' realization of the shifts in market fundamentals and the potential for price increases. Rapid increases in fabrication demand allowed silver consumption to catch up with production from 1990. The Silver Institute estimates the cumulated shortfall, over the three-year period 1989-92, at more than 210 million ounces (see Table 1). For 1993, the shortfall is expected to widen to 115 million ounces, orl9% of world demand. Low prices related to record stockpiles of silver. For more than a decade, silver prices have been falling precipitously and investors almost completely abandoned silver as an investment vehicle. Throughout the 1980s, the market was characterized by excess supplies over demand and a continuing increase in the total stocks of silver. Investors' disposal of stocks also 193 Table 1: World Supply and Demand for Silver, 1985-2005 (million troy ounces) Balance Mine Secondary Total Fabrication Demand Coinage Total Supply Production Produciton Supply Industrial Devaluing Demand Demand 1985 329.9 152.9 482.8 324.2 63.8 13.4 401.4 R1.4 1986 320.3 124.9 445.2 343.0 67.1 26.8 436.9 8.3 1987 338.2 164.0 502.2 360.0 70.6 30.4 461.0 41.2 1988 344.0 158.1 502.1 380.7 72.5 25.3 478.5 23.6 1989 358.4 153.2 511.6 399.3 78-7 26.3 504.3 7.3 1990 370.1 135.0 505.1 417.3 99.4 29.8 546.5 -41.4 1991 358.1 134.9 493.0 419.5 131.6 27.7 578.8 -85.8 1992 362.8 138.9 501.7 410.0 150.9 29.4 590.3 -88.6 Plaicand 1993 340.0 142.0 482.0 410.0 156.9 30.0 596.9 -114.9 1994 360.0 146.0 506.0 410.4 161.6 30.5 602.5 -96.5 1995 385.0 152.0 537.0 408.4 164.9 30.9 604.2 -672 2000 440.0 165.0 605.0 413.5 191.1 32.5 o37.2 -32.2 2005 490.0 180.0 670.0 415.6 216.3 34.1 666.0 4.0 Source: CPM Group. (historical); World Bank, Intcrnational Economics Department. (projected). forced accumulation of stocks by producers, consumers, financial institutions, and governments. Stocks of silver held by various groups reached extremely high levels in recent years, probably in excess of 1 billion ounces according to estimates by the CPM Group. Reported stocks--those held by governments, commodity exchanges, and dealers--amountd to 509 million ounces in 1992, or 86% of 1992 world consumption. Figure I shows the historical relationship between market stocks (exchange and dealer stocks) and silver prices (in constant 1990 dollars per ounce deflated by the G-7 consumer price index). Clearly, there has been a negative relationship between stocks and prices, but silver prices have fluctuated much more widely than market stocks. This behavior can be partly explained by the existence of large unreported stocks. During most of the 1970s and again over the 1990-92 period, supply shortfalls were supported largely by drawdowns of unreported stocks; the decline in market stocks did not adequately reflect the fill extent of the market imbalance and stock changes. The opposite process took place during the 1980s. Unreported stocks probably increased much more than market stocks to account for such a steep decline in silver prices from 1980 to 1992. 194 Figure 1: Market Stocks and Prices of Silver, 1970-92 200 160 140 120 o D 20 - a a3 T13o 2 " -a. 'a a- -a - 0 1 I I I I I1 i III I II tO -, - Market Stocks - - SlherPrices Prices will remain stable in the near term. The implication of the above for the outlook of silver prices is clear. Over the near term to 1995, supply shortfalls are expected to widen owing to robust demand growth and declines in mine production. However, price increases above and beyond what has transpired in 1993 are not likely to be substantial because of the large reported and unreported stocks on hand. In the next two years, we expect silver to trade within the range of $5.00-5.50/oz. Silver prices could be volatile in the long term. Over the longer term, silver price dynamics will be influenced by the joint-product nature of silver supplies. Hence, if the demand for silver grows faster than the demand for base metals, then a supply shortage for silver will eventually develop. The adjustment mechanism that restores the supply and demand equilibrium is largely limited to the impact of price on demand. Since the price elasticity of demand is usually low in the short run and the secondary supplies respond only when the price is high, the market price of silver could be highly volatile. Large stocks, however, have usually provided the stabilizing influence. For the period 1995-2000, we project that the supply shortfall will continue but its size will diminish due to higher prices; the market is expected to achieve an approximate balance by the year 2000.2 Existing stocks will be sufficient to meet the expected supply shortfalls but silver prices are expected to rise slightly in real terms. However, this phase of the cycle could be vulnerable to speculative forces, particularly if information on stocks is not well established and publicly known. Beyond 2000, another down cycle for silver prices could occur. 2 Note that coinage demand is not really consumption but a form of stock holding. 195 Table Al: Sliver - Prices, al 1950-93 (Actual) and 1994-2005 (Projected) [Cttrov oz.) ---- Current 19----190 ConslantS-- G-5 MUV b/ G-7 CPI c1 Amuw 1950 74 453 597 1951 89 473 648 1952 85 431 593 1953 85 443 588 1954 85 453 579 1955 89 465 605 1956 91 460 605 1957 91 450 592 1958 89 433 568 1959 91 449 582 1960 91 442 574 1961 93 439 567 1962 109 505 647 1963 128 607 739 1964 129 603 728 1965 129 599 706 1986 129 579 683 1967 155 686 798 1968 215 958 1.074 1969 179 759 859 1970 177 706 801 1971 155 585 655 1972 169 585 647 1973 256 767 860 1974 471 1.158 1.428 1976 442 978 1.193 1976 435 950 1.138 1977 462 918 I.093 1978 540 932 1.042 1979 1.100 1.690 2.022 1980 2.063 2.866 3.364 1981 1.051 1.454 1.700 1982 795 1.117 1.302 1983 1.144 1.645 1.845 1984 814 1.196 1 316 1985 614 895 973 i986 547 676 718 1987 701 789 615 1988 654 686 706 1989 550 581 597 1990 482 482 482 1991 404 395 384 1992 394 369 355 1993 430 401 380 Emolected 1994 510 460 438 1995 530 465 444 1996 550 468 448 2000 580 445 423 2005 620 422 400 at For 1950-61. unrefined, producer price; beginning 1962 Handy & Hannan, refined, delivered New York. b/ Delated by G-5 Manufacturing Unit Value (MUV) Index. c/ Deflated by G-7 Consumer Price Index (CPI). Sources: Australian Mineral Economics Ply. Ltd., SlIver World Supply & Demand to 1979 and Metals Week from 1980 onwards (actual): World Bank. Intematlonal Economics Deparlment (projected). 196 Annex I Privatization and Liberalization of the Mining Sector in Developing Countries: Implications for Market Outlook Introduction The past several years have seen a growing movement among developing countries towards the privatization and liberalization of their mining industries. Privatization of state-owned enterprises (SOEs) in developing countries started in the late- 1970s as part of an effort to enhance economic efficiency through market-based resource allocation. Related to this effort was a package of structural reforms designed to open the economy to greater competition. The World Bank and other multilateral institutions have played a leading role in fostering the reforms through structural and sectoral adjustment lending. Until recently, however, the mining sector has been left largely unaffected by the reform movement. In the early 1980s, Chile opened the mining sector to foreign investment, which led to the development of the large Escondida copper mine, among others. However, Chile stopped short of privatizing the Corporacion Nacional del Cobre de Chile (Codelco). Early examples of privatization of large state-owned mining enterprises (SOMEs) include Mexico's divestiture of two copper producers, Mexicana de Cobre in 1988 and Cananea in 1990. Privatization of SOEs during the 1980s mostly involved the manufacturing and service sectors. Lately, the momentum appears to have accelerated, with Peru embarking on privatization of all of its SOMEs. Privatization of SOMEs is being planned or actively considered in a number of countries such as Bolivia, Brazil, Chile, Ghana, Venezuela, Zambia, and Zaire. In addition, mining laws and regulations have or are being liberalized in many of these countries including Argentina, Bolivia, Brazil, Chile, Mexico, Peru, and Zambia. The purpose of this annex is to explore the market implications of the structural changes outlined above. It will focus on key base metals and iron ore in developing countries; fuel minerals and non-market economies are beyond the scope of this annex.' First, the curent state of state ownership and control -f the mining industry in developing countries are reviewed. Then the market implications of the current and future structural reforms are discussed. 1 So far, fuel minerals-petroleum and natural gas--have largely been successful in fending off the reform pressure. This may be changing, however. See an annex to the petroleum section of this report for recent developments in this area, including a few early examples of divestiture of state-owned petroleum industry. 197 Annex I Mining and Mining Enterprises in Developing Countries History and Current State As late as the mid-1980s, SOMEs in developing countries were perceived as a growing and dominating trend. A UN-sponsored study estimated that by the mid- 1980s, SOMEs, including those in the (then) centrally planned economies, accounted for 40% of the value of the world's non-fuel minerals output.2 An earlier study showed that in 1981, mining enterprises with significant government ownership (defined as 5% or more of total equity) accounted for 45% of market economies' bauxite mining capacity, 41% of copper mining capacity, and 56% of iron ore mining capacity. Those with majority government ownership accounted for 23% of bauxite mining capacity and 32% of copper mining capacity.3 The shares of these enterprises in aluminum and copper smelting capacities were 19% and 30%, respectively. In the early 1980s, state ownership of tin mining capacity was estimated at 30 % of the market economies' total, 20-25 % for lead and zinc, 15 % for nickel, and 85 % for cobalt. In the 1950s, developing country governments rarely participated in the ownership and management of mining enterprises. In the 1960s and 1970s, the number of SOMEs grew rapidly, mainly through the nationalization of mining assets in developing countries. Distinct events mark the growth of SOMEs for different metal-. For copper, Zaire's nationalization of copper mines in 1967 was followed by similar moves by Chile, Peru, and Zambia through the 1970s. For bauxite, the process started in 1971 with Guyana's nationalization; SOMEs' role in bauxite production continued to expand until 1980 with rapid capacity expansions in Guinea and Brazil. State ownership of iron ore mining has a longer history (Sweden's LKAB in 1907, South Africa's ISCOR in 1928, and Brazil's CVRD in 1942). SOMEs' share of world markets continued to increase with additional nationalizations in the 1970s (Venezuela, Mauritania, and Peru) and rapid expansion of CVRD's production. Bolivia and Indonesia nationalized tin mining in the 1950s; Malaysia, Nigeria, and Zaire significantly increased government equity shares in tin in the 1970s and early 1980s. Cuba nationalized nickel mining in 1960; the only other SOME in nickel is Indonesia's Aneka Tambang. Even the countries that did not completely nationalize the mining sector erected various legal and policy barriers to private investments, in the name of protecting national interests, domestic industries, and minority groups. In many developing countries, constitutional provisions prohibited majority ownership of mining enterprises by foreign interests. The laws and regulations, applied in varying degrees in different countries, 2 M. Ericsson and A. Tegen, "State Mining Enterprises in the International Minerals Industry," in 7he Role of State Enterprises in the Solid Minerals Industry in Developing Countries, United Nations, Stockholm. 1989. p. 29. SOMEs in this study are defined as those with majority equity holdings by the government. M. Radetzki, State Mineral Enterprises: An Investigation into 1heir Impact on International Mineral Markets. Resources for the Future. Washington D.C.. 1985. 198 Annex I relate to all aspects of mining investment and operations--explomtion and mining licenses, ownership rights, foreign exchange controls, import and export regulations, tariffs, accounting and labor practices, and royalties and other taxes. At one extreme is the case of Brazil where a mining enterprise has to pay 50 different taxes and cope with a host of laws and regulations that are often discretionary. Conversely, the mining environment has been made conducive to private investment in Botswana, Chile, Ghana, Papua New Guinea, and Zimbabwe. Recently. mining laws and regulations have been reformed in Argentina, Bolivia, Ecuador, Mexico, and Peru. Mozambique, Namibia, and Zambia are in the process of following suit. The number of SOMEs in developing countries has remained largely unchanged since the early 1980s. Tables 1-3 show mining enterprises with significant state ownership. The only major changes that have taken place in the past decade are the privatization of La Caridad and Cananea copper mines in Mexico. Otherwise, Tables 1-3 contain almost identical set of enterprises as those compiled in the early 1980s.4 What is different, however, is that some of the major SOMEs in the tables are slated for privatization in the near future. Some others have been the subject of debate in recent years. Many more will be subjected to closer scrutiny in the years ahead. Based on available infoimation, the last colume of the tables attempts to indicate progress made towards privatization. Developments in Individual Countries CHn.E As the world's largest producer of copper and significant quantities of other metals, Chile's policy changes are bound to have repercussions for the developing world. Chile has had one of the most extensive privatization experiences in the developing world. By the end of the Allende regime (end of 1973), Chile had about 600 SOEs that accounted for half of its GDP. The following military government adopted privatization and liberalization policies. However, by 1983, SOEs still accounted for 40% of GDP and 80% of mining output. Chile has followed the policy of liberalizing the mining sector while continuing state ownership of Codelco, the world's largest copper producer. Private domestic and foreign investments in Chile's mining sector increased significantly following the new Mining Code in 1983 and Decree Law 600 in 1974, and subsequent amendments which liberalized foreign investments. Between 1983 and 1987, foreign investments in Chile's mining sector amounted to $344 million. It was during this period that two large mning projects began -- Escondida and Disputada Expansion. As a result, Codelco's share in Chile's mine production of copper declined from 82% in 1982 to 62% in 1992; that is, 75% of the increase in Chile's production during this period came from the private sector. 4 See M. Radezki, op. cit.. pp. 29-36. 199 Annex I Table 1: Developing Countries' State-Owned Copper Producers, 1992 SOME 1992 Production ('000 tons) b/ Government Privatization Mine Output Refined Output Equity Shure Plan a) (%) Africa Botswana BCL Ltd 19 40 n Morocco Somifer, etc. 14 54/100/28 n Zaire Gecamines, etc. 158 57 100 i Zambia ZCCM 433 480 60 f Zimbabwe Merits/Mhangur 9 11 79/55 n Asia & Pacific India Hindustan 54 45 100 n Iran Nat. Iranian 108 102 100 n Cop. Malaysia Mamut Mine 29 49 n Oman Oman Mining 13 14 100 n Pap. New Guinea Ok Tedi 193 30 n Philippines Marcopper, etc. 56 Ill 49/100/83 i Latin America Brazil Caraiba 30 158 100 i Chile Codelco 1,253 955 100 d Enami 35 210 100 d Peru Centromin 32 55 100 f Mineroperu 27 197 100 f Tintaya 51 100 f Europe F. Yugoslavia RTB Bor, etc. 75 115 100 n Turkey Etibank 32 105 100 d Total 2,622 2.615 % of Market Econ. Total 35 34 a/ In the order of progess made toward privatization. f. Privatization is in progress or firmly committed to do so. i: Intention to privatize has been expressed. d: Privatization has been considered. n: Privatization prospect is unknown a has not been considered. b/ Includes some estimates. Sources: Raw Materials Group, Production and Equity Share Data; World Bank, International Economics Department. Privatization Plan. 200 Annex ] Table 2: Developing Countries' State-Owned Bauxite and Alumina Producers, 1992 1992 Production ('000 tons) b/ Government PrViVLzation Bauxite Alumina Equity Share Plan at Africa Ghana Ghana Bauxite Co. 310 55 d Guinea Guinea Bauxite Co. 10.700 49 n Frigula 2.500 604 49 A Kindia Bauxite Co. 3,000 100 n Asia India Bharnt, etc. 3,350 1.200 45/100 n Indonesia Aneka Tambang 650 100 n Latin America Brazil Mineracao R D Norte 7,030 20 i Guyana Bernmine/Linmine 700 100 i Aronima Bauxite Co. 1,500 50 n Jamaica Jamalcn 2,300 710 50 n Kaiser Bauxite Co. 4,000 51 n Alumina Partners of J. 2,400 1.200 18 n Venezuela CVG Bauxiven 950 1.360 100 d Europe Turkey Etibank 400 150 100 d F. Yugoslavia State Producers 2,000 680 100 n Total 41,790 5,904 % of Market Econ.Total 45 17 al & b/ : See footnotes in Table 1. Source: See Table 1. 201 Annex I Table 3: State-Owned Iron Ore Producers In Developing Countries, 1992 SOME 1992 Government Privatization Production b/ Equity Share Plan al (million tons) (%) Africa Algeria E. Nac d. Fer Phos. 3.00 100 n Egypt Egyp. Iron & Steel 2.00 100 n Liberia Limco 1.70 100 n Bong Mining 0.20 50 n Mauritania SNIM 8.23 77 n Tunisia Djebel Djerissa 0.28 100 n Zimbabwe Buchwa Iron Min. 1.04 87 n Asia India Kudrernukh 4.71 100 n National Min. 9.00 100 n Sesa Goa 2.76 40 n Iran National 6.50 100 n Latin America Brazil CVRD 67.90 51 n1 CHB Pelotizacao 3.00 26 n CIB Pelorizaca 3.00 26 n CSN 6.22 100 n MSG 8.40 26 n Nibrasco 7.00 26 n SA M. Trindade 10.29 c/ n Samarco 7.57 c/ n Mexico Pena Colorada 2.86 100 n Venezuela CVG Ferrominera 18.05 100 n Europe Turkey Tur. Demir v. Celik 2.00 100 n F. Yugoslavia State Producers 1.50 100 n Total 177.21 % of Market Econ.Total 53 at & bi: See footnotes in Table 1. c/ Partially owned by foreign government. Source: See Table 1. 202 Annex I Codelco is the world's largest producer of copper and currently generates about 20% of Chile's government revenue and 33% of export earnings. Codelco has long been considered a mature SOME, in the sense that it has the technical and management capabilities to operate like a large commercial mining enterprise. Its performance has been well regarded in the industry, although the usual inefficiencies of a SOME have been well known . Since 1991, Codelco has been allowed to form joint ventures with foreign investors to develop mining projects on Codelco-owned properties. During the past several years of high coppe nrices, exploration and development activities have been intensive in Chile. Chile has oTered highly attractive conditions for foreign investors-- excellent resource potential, relatively stable economic and political conditions, hospitable mining environment in terms of mining laws and regulations, foreign exchange controls, labor relations, and physical and human infrastructure. As a result, Chile now has a number of new projects at various stages of development. Codelco is working on at least two joint venture projects with total production capacity of 375,000 tons. In addition, private investors, mainly foreign mining companies, have plans to develop about a dozen large and small projects with total capacity of more than one million tons. Some of them are under construction and will come on stream by 1995. If all of these projects materialize, Chile's copper production could reach 3.4 million tons by the year 2000. These increases could take place without privatizing Codelco. For the time being, the prevailing view appears to be that Codelco is too important to be handed over to the private sector. PERU: The new government of Peru has taken a number of steps in recent years towards liberalizing the mining sector by: (a) enacting a decree in July 1991 allowing majority private ownership of major SOEs; (b) enacting a new mining law in November 1991 which established transparent rules for granting exploration and exploitation concessions, rights of free access to foreign exchange, and the right to remit profits; (c) freeing more than two million hectares of land for private sector exploration; and (d) reorganizing and streamlining sector agencies. All state-owned mining and metals enterprises are scheduled for privatization, which include Hierm Peru, Centromin, and Minero Peru, and Tintaya.5 International response to Peru's privatization efforts has been favorable. In pre-qualification bids for the sale of Centromin and Minero Peru assets, nearly all major international mining companies participated. This may be a reflection of Peru's mineral potential, which is considered a natural geologic extension of Chile. Although the institutional changes have been impressive, it will take time to rebuild confidence in Peru's 5 During the 1980s. SOEs accounted for 15% of GDP and 30% of merchandise exports. The number of SOEs increased from 29 in 1968 to 177 in 1990, mostly through nationalization. The financial performance of the SOEs has been poor: by 1989. most SOEs were operating at a loss. Lack of internal funds and external financing have resulted in poor maintenance, as well as little investment for capacity expansion. Since mid-I 990, more than 10.000 SOE employees have been laid off as a part of workforce reduction plan to enhance their attractiveness prior to privatization. 203 Annex I political and economic future. Hierro Peru's Marcona iron ore mine was sold to Chinese interests in October 1992. In addition, two copper properties, Condestable mine and Quellaveco deposit, have been sold. The Anglo American subsidiary that bought Quellaveco hopes to develop it into a 40,000 tonlyear solvent-extraction electrowinning (SxEw) production unit. Minero Peru's Cerro Verde copper mine was sold in October 1993 to Cyprus Minerals of the United States. Cyprus Minerals is expected to invest $485 million in Peru's mining industry. Next in line for privatization are Minero Peru's Ilo smelter and a zinc smelter. Minero Peru owns a number of other mineral deposits that will become available for private sector development. Tintaya and Centromin properties have been under study for privatization in 1993, but this schedule has been delayed. Centromin has the La Oroya smelter and seven mines. Centromin mines are not high grade, low-cost deposits, but the existing deposits and surrounding areas offer attractive opportunities for exploration and development. In addition to the known deposits of Minero Peru and Centromin, there are numerous other areas with the potential for a wide range of metals production. BRAZIL: Brazil offers a great geological potential for a vast array of ferrous and non-ferrous metals, precious stones, and specialty minerals. It is a major world p .xucer of iron ore, tin, bauxite, gold, nickel, manganese. and phosphates. Production of these metals and minerals has generally been increasing over the past 12 years, despite apparently inadequate investments in exploration and mining capacities. The 1988 Constitution restricts foreign equity participation in mining to less than 50%, favors garimpo cooperatives, and complicates sector administration. The mining code is excessively discr-ionary and bureaucratic, and falls short of meeting the needs of a modem mining industry. The tax system is complicated and heavily taxes profits and capital goods. Deregulation and privatization of industries have proceeded, but numerous distortions remain. Privatization of the mining industry and expansion of private mining activities are seriously hampered by the constitutional prohibition of foreign majority participation and the ban on exports of certain ores. Lack of foreign participation so far is due to uncertain economic and political prospects, as well as the legal and regulatory restrictions. Brazil has had a long tradition of state ownership and intervention in the mining industry. The 1990 privatization program started a process of transferring all federally owned manufacturing entities to private ownership. The program included eight state-owned steel companies (five of them are integrated steel mills) with total assets of $6.2 billion. By September 1993, the privatization program of steel companies was completed, affecting some 70% of Brazil's steel production. Many of the privatized steel mills have already reported profits, compared with $13 billion losses they accumulated as state-owned companies. The 1990 privatization program excluded PETROBRAS and Compania do Valle do Rio Doce (CVRD). CVRD is a 53% state-owned conglomerate that has been 204 Annex I operating more or less independently and profitably. CVRD is the world's largest producer of iron ore (it accounted for 22% of the world iron ore production in 1990); it also produces bauxite, gold. and manganese. The World Bank financed $304.5 million in 1982 in developing CVRD's Carajas iron ore project. Mineracao Caraiba, a 100% state- owned copper producer, has been undergoing pre-privatization evaluation; pending the latest outcome. it could be privatized in early 1994. Unless investments are made in new underground mines, current output of about 32,000 tons of copper in concentrate will cease by 1998 due to reserve exhaustion. Brazil meets about 75% of its domestic copper demand by importing copper concentrates. CVRD owns the Salobo copper deposit that it has been trying to develop in conjunction with foreign mining companies. The 125,000 tons/year project, approximately the size of current imports, is apparently facing difficulties in view of Brazil's restrictive mining laws and bewildering taxation regime, among other reasons. Brazil needs a fundamental reform of its mining sector, as well as the economy as a whole. Even if CVRD is not privatized, the private sector should be allowed to develop a project like Salobo. GUYANA: Guyana's bauxite production is dominated by two SOEs, Berbice V' ing Enterprise Ltd (BERMINE) and Linden Mining Enterprise Ltd (LININE), successors to the Guyana Mining Enterprise, Ltd (GUYMINE). Years of state ownership and mismanagement has left these enterp'ises in extremely poor physical and financial condition. Rehabilitation will require large investments that will have to come from abroad. Privatization of these enterprises is a priority task of the government GUYMINE's performance improved in 1991-92 as a result of depreciation of the domestic currency, closure of marginal units, and 25% reduction of the workforce. Guyana had privatized 14 public enterprises by October 1992, but the process lacks transparency and strategy. ARGENTINA: Since the inauguration of the Menem administration in 1989, Argentina carried out an ambitious program of privatization. The program included the partial sale of YPF, the state-owned petroleum producer, and the opening up of public lands for private sector exploration and production. Non-fuel mining has been insignificant in Argentina, despite a good potential. Argentina revised the mining code in 1993 to foster development of metals mining. These policy changes have stimulated increased exploration activities. MExico: After years of stagnation, Mexico began restructuring the mining sector in the late 1980s. Mexico has had a long tradition of private mining enterprises, and a number of renowned mining companies. However, these private companies were denied access to certain public lands (national mining reserves) and certain "strategic" minerals, and foreign private companies were not allowed to hold majority ownership in a Mexican mining interest. Mexico started out with the privatization of two state-owned copper mines, La Caridad and Cananea. This was followed in 1992 with the passage of new mining laws that removed the above restrictions and modernized the mining sector 205 Annex I administration. Since 1988 when restructuring began, annual exploration investment in Mexico's mining industry approximately tripled. iouvA: Under the constitution, Bolivia's largest SOME, Comibol, cannot be privatized. Bolivia's strategy has been to get around this restriction by forming joint ventures between Comibol and the private sector, and eventually reduce Comibol into a holding company. However, this strategy is facing strong opposition from powerful labor unions. Bolivia has to resolve these political issues and lay firm ground rules for private sector participation in order to realize its significant mining potential. VENEZUELA: State-owned Guayana Development Corp. (CVG) is nearing financial collapse, while its aluminum smelters. Alcasa and Venalum, lost huge sums in 1993. With the election of a new administration, the prospect for management rationalization of these enterprises, including privatization, appears to have improved. Venezuela has excellent resource endowments for bauxite and aluminum, iron ore, and coal, among others. zAmBiA: The Zambian mining industry is at the threshold of fundamental structural change. The democratic government that came to power in 1991 is committed t, privatizing the mining sector and creating a more attractive environment for investment Production of metals and minerals, excluding gemstones and coal, is the exclusive domain of Zambia Consolidated Copper Mines Ltd (ZCCM). The government commissioned a study of privatization options and procedures for ZCCM, which was due for completion in late 1993. Its implementation may take a few more years, and important details remain uncertain at this time. However, the policy proclamation already has generated considerable domestic and foreign interest in the future of Zambia's mining industry. By the late 1990s, ZCCM's production is expected to fall sharply due to the anticipated closure of the Nchanga Open Pit (annual copper production about 160,000 tons). Zambia has several promising large and small copper deposits available for development. Among the potential mines, the deep underground Konkola deposit with 3.5-4.0% copper content is the most likely candidate in line for development. ZCCM is considering an underground mining project at Konkola with production capacity in excess of 200,000 tons annually. ZCCM needs to find a credible private partner to carry out the project. Phelps Dodge recently obtained the exploration license for the Lumwana surface deposit with an estimated one billion tons of 0.8% copper ore. It is located in a relatively remote northwestern part of Zambia and will require large infrastructure investment. oTHER AFRICA: Zaire announced its intention to privatize Gecamines. When the current protracted political turmoil is resolved, restoring Gecamines' production capacity back to previous levels will require large investment At that point, the privatization option may be more seriously considered. However, the process is likely to 206 Annex I take a long time. Africa offers a whole spectrum of minerals and mining regimes.6 Some African countries (for example, Botswana, Ghana, and Guinea) have been successful in developing new mining projects through joint ventures between the government and the private sector. Also successful have been the countries that fully allowed private sector investrnnta in mining (for example, Namibia, Sierra Leone, and Zimbabwe). An increasing number of African countries have privatized or are planning to privatize, and reform their mining sectors. Implications for Market Outlook In the wake of developing countries' nationalization of the mining industry in the 1960s and 1970s, conflicting hypotheses have been advanced with regard to its likely impact on metals markets. One view expressed was the concern that nationalization would likely restrict supplies and hence raise prices to the consumers. The principal justification for this view was the observation that SOEs tend to be inefficient, heavily taxed, and deprived of capital for capacity maintenance and expansion. An opposite proposition has also gained wide acceptance; it states that developing countries need to expand capacities of SOMEs aggressively to finance development plans and are likely to increase production when prices are low to meet certain revenue targets. Proponents of t! *s view often assume that subsidies of one kind or another from governments or multilateral organizations cause SOMEs to operate inefficiently and even expand. The above arguments suggest that state involvement in the mining sector can affect international market prices of metals through its impact on the volume of supplies and the costs of production in the short and the long run. In the short run, the impact is mainly through adjustments in the capacity utilization rate to changing market conditions. In the long run, both production volumes and costs will be affected by investment decisions. Earlier studies of this issue have not made a clear distinction between the short- and long-run consequences of state ownership of mining companies. In order to assess the likely impact of privatization on the international metals markets, it is important to know what impact state ownership has had in the past. Roughly speaking, the effect of privatization could be a mirror image of nationalization and state control. Short-Run Supply Behavior and Price Volatility So far, research into the short-run market impact of state ownership has uncovered no definitive evidence supporting the hypothesis that SOMEs tend to be more inflexible than their private counterparts in adjusting capacity utilization rates downward at times of low prices. Neither was there firm evidence for the suggestion that SOMEs increase price volatility by not reducing output or even increasing it when prices decline. Existing studies have attempted to estimate versions of standard supply equations to detect any systematic difference in the sign and magnitude of the estimated supply 6 For a survey, see Strategy for African Mining, World Bank Technical Paper No. 181, 1992. 207 Annex I elasticity between private and state-owned suppliers.] However, the supply functions invariably were estimated for the entire historical range of prices, while the hypothesis relates only to a period of low prices. Actually, it would be odd if SOMEs had negatively- sloping supply curves at all prices. There has been plenty of anecdotal evidence that SOMEs are prone to be less adaptable to changing market conditions than their private counterparts. However. this inflexibility is likely to manifest itself clearly only over a number of years. In a market downturn, producers, both private and public, generally resist production cutbacks. This is particularly true in an oligopolistic market that has characterized most international metals markets for much of the past three decades. In a private setting, the highest-cost marginal producers will shut down first. In the case of a SOME which is important to the country, low international market prices raise the shadow price of foreign exchange to the developing country, and the government feels obliged to intervene with an exchange rate devaluation. This makes the SOME an intra-marginal producer. Thus, even if SOMEs respond to lower prices with smaller production cutbacks than private companies,' such actions may be justified on economic grounds. Thus, it seems a moot question whether privatization of SOMEs will c" ange the short-run supply behavior and reduce price volatility. By definition, privatization implies less government subsidies; the incidence of exchange rate devaluation when metals prices are low probably will be reduced. Hopefully, however, the need to do so also will be reduced as private ownership and management improve efficiency and reduce costs. An immediate impact of privatization will be the reduction of supplies due to the closure of inefficient mines. Mines that are losing money under state ownership are not necessarily inherently uneconomic. With rehabilitation and rationalization, many can be converted into viable enterprises under private ownership. Actual loss of production in the wake of privatization will be limited to a few obviously marginal cases. Investments, Output, and Prices The market impact of state ownership and control could become more evident in the long term. The key question is whether state ownership has led to inefficiencies, higher costs, lack of investment and reduced output in the long term. The experience of the past three decades, however, presents a mixed picture on this point. 7 For a brief survey of existing studies, see . Dobozi, "State Enterprises, Supply Behavior and Market Volatility." Resources Policy. March 1993. pp. 40-50. 8 Cases documented by Radetzki for copper over the 1974-82 period do not indicate that developing countries dominated by SOMEs consistently reduced production less than industrial countries at times of low prices. See M. Radetzki, op. cit., p. 50. 208 Annex I Let us first focus on the impact of state ownership on the level of output. Figures 1-3 show the shares of the developing countries with dominant state participation in world mine production of copper, bauxite, and iron ore.9 For about a decade following Zaire's nationalization in 1967. the developing countries with state-dominated copper mining sector experienced substantial declines in their share of world production. The initial decline was attributed to the lack of indigenous technical and managerial skills, and the political and economic uncertainty surrounding the new regimes. The same problem was also present following the nationalization of bauxite mining during the first half of the 1970s. Iron ore was an exception in this regard, because SOMEs in iron ore were mostly in existence by 1960; any initial negative effect of nationalization in Venezuela, Chile, Peru, and Mauritania in the early 1970s appears to have been small in relation to expansions by Brazil's CVRD. Over the longer term, Figures 1-3 show three different patterns for the output share of developing countries with state-dominated mining industries. Copper production shows an increasing share over the medium term but eventual declines in the long term. Bauxite shows relative stability in the developing countries' share following the initial decline, while iron ore shows steady rises in the share of developing countries' output Thus, the claim that SOMEs restrict capacity expansion and lose market share r--er the long term appears to hold true for some metals but not for others. At the individual SOME level, the trend also varies within each metal. In the case of copper, most of the developing countries' SOMEs were able to expand or at least maintain capacity through the early 1980s, largely due to relatively high copper prices during the 1970s. However, it was followed by a period of low demand growth, excess capacity, and low prices (1981-86) which wreaked havoc on most SOMEs in developing countries. Practically all SOMEs, including Chile's Codelco, were unable to finance capacity expansion. It was during this period that Chile liberalized the mining sector to allow foreign private investment in new mine developments. As a result, most of Chile's production increase during the past decade came from the private sector. SOMEs in other countries were unable to adequately maintain existing capacity, not to mention upgrading or expansion. Thus, production in Mexico, Peru, Philippines, Zaire, and Zambia languished or fell sharply over the 1985-92 period. Conversely, the private sector copper producers in industrial countries made strong efforts to reduce costs and invest in low-cost deposits in Indonesia, Portugal, and Papua New Guinea that allowed foreign private investments. The sharp rise in private sector production over the 1985-92 period (Figure 1) reflects production increases in these countries as well in the United States and 9 Developing countries included here for having significant state participation in the mining sector for any part of the 1961-92 period are: Copper Brazil. Chile, India, Mexico, Peru, Turkey, former Yugoslavia, Zaire. Zambia. Bauxite: Brazil. Ghana, Guinea, Guyana. India. Indonesia. Jamaica. Turkey. former Yugoslavia. Venezuela. Iron Ore: Algeria, Brazil. Chile. India, Liberia. Mozambique, Mauritania, Peru, South Africa. Turkey. former Yugoslavia. Venezuela. 209 Annex I Figure 1: World Market Shares of Copper Mine Production 50 o 0.0 0.0 45 -0 EL K LMs vit Signifflcant SaM Paw~pain 0 b a e . a a i i i i a i i 0 00 0 0.0 .0C0 Figure 2: World Market Share of Bauxite Production .o- 0 Oler Make E=o~me 55-' 20 n_ 0Þ , o 4 - -o o .-o a 235 - _ _ LDcs wit Share Pautcp tion 0 -0 00 0 ) *21 Annex I Figure 3: World Market Share of Iron Ore Production 0 -o Other Market Econoies oo -o o0 0.o * * 'o -o .e -o .o - 530 20 10. w- D O NO 0 ID 0 1 03 00 -1 0 -a. Australia. Figure 1 overstates SOMEs' share for the 1985-92 period to the extent that it includes Chile's private sector production. The experience of SOMEs in copper mining clearly demonstrates that SOMEs, despite favorable resource endowments, have been unable to compete with the private sector on a sustained long-term basis. In the long term, they have lost market share and their production was held at lower levels than would have been if they were private. However, this finding does not lead to the conclusion that long-term copper prices were higher as a result. The reason for this is the compensating adjustments made by the private sector. Nationalizations may have caused prices to increase over the short term, but the private sector has been resourceful enough to find alternative sources of supplies elsewhere. During the 1980s, copper prices reached record-low levels in real terms. The lessons of the past suggest that privatization during the 1990s, no matter how extensive, will have little long-term effect on copper prices. Increased investment in new mine capacities in newly privatized developing countries will be offset, in the long run, by declines in investments in other countries with higher costs or difficult geologic conditions and environmental regulations. Already, there are indications that the US mining companies are shiftag exploration and development investments south of the border--to Mexico, Peru. Chile, and Argentina. The United States and Canada are becoming increasingly unattractive due, among other reasons, to environmental restrictions. There has also been a movement away from Chile to Peru, because some of the new deposits recently studied in Chile are considered to have somewhat lower grade ores. The market essentially will regulate supply, demand, and investment decisions. There appears to be little danger that just because SOMEs in developing countries are privatized, the market will be burdened with excess capacity for an extended period. 211 Annex I The situation for bauxite and iron ore has been somewhat different in that, except for Australia, new production came almost entirely from developing countries. In the early 1960s, the developing countries were the predominant producers of bauxite, while the industrial countries produced the bulk of iron ore. In subsequent years, the emergence of Australia as a major bauxite and iron ore producer helped increase the high- income countries' share of bauxite and stabilize its share for iron ore. Bauxite production has declined in some developing countries (e.g., Surinam and Guyana) but increased in other developing countries (e.g., Brazil, Guinea, Venezuela, and India). Even after nationalization, almost all of the developing countries' bauxite producers have had significant equity participation from the host government as well as from the world's major aluminum producers. Vertical integration remains strong to the extent that the international spot market for bauxite has been marginal; the bulk of bauxite has been traded through internal accounts of the major aluminum producers or through long-term contracts. The developing countries' governments have rarely had direct control over investment decisions, except by way of the different levies they sometimes imposed on production and exports. Thus, state ownership alone does not explain why bauxite production increased in some developing countries and declined in others. It depended, among other factors, on the post-nationalization relationship these c juntries maintained with the aluminum producers. Privatization of bauxite mining is not likely to change this vertical integration in the world's aluminum market. If anything, privatization may tend to strengthen the vertical linkages. State ownership of bauxite mining was not a cause for the current excess supply capacity for bauxite and aluminum. Likewise, privatization is not likely to cause excess supplies of bauxite. During the past two decades, iron ore production declined in almost all high-income countries, except for Australia, and increased in most developing countries except for Liberia. This pattern is broadly consistent with changes in the costs of production. Most high income countries that have been producing iron ore for a long time (United States, Sweden, and France) are now left with low-grade ore that costs on average more than new producers such as Australia and Brazil. This cost advantage appears to have been sufficient to overcome inefficiencies of state ownership in most aeveloping countries. Brazil's CVRD, the world's largest producer of iron ore, has been highly profitable and has financed most of its capacity expansion projects. The world iron ore market is dominated by two large suppliers and major steel mills in high-income countries. The market structure may be characterized as being highly oligopolistic on both the supply and demand side. Although privatization of the iron ore sector in developing countries seems unlikely at this point, it has the potential to make the market more competitive on the supply side. The implication would be for lower prices than under the current regime. 212 Annex I Efficiency, Cost of Production, and Prices It is widely believed that SOMEs tend to have higher costs than private enterprises, operate inefficiently and wastefully, and fail to catch up with technological innovations. These conditions emanate from a multiplicity of objectives, usually imposed on them, and lax controls on financial and personnel management. To illustrate these points. Figures 4 and 5 compare cash operating costs and labor productivity trends of two private and three public copper mining enterprises. Figures 6 and 7 show similar data for one private and two public bauxite/aluminum producers. During the early 1980s, Phelps Dodge was a high-cost producer of copper. However, in subsequent years it has achieved phenomenal cost reductions through increases in labor productivity, technological advances such as the SxEw technology, and the closure of high-cost mines. Codelco has been a low-cost producer of copper and it appears to have made some progress in cutting cash costs and increasing labor productivity during the 1980s. However, the reduction in Codelco's cash costs, as well as those of ZCCM and Freeport Indonesia, was achieved mostly through real depreciation of their currencies relative to the US dollar. Figure 8 shows the same cash costs in terms of constant 1980 dollars and exchange rates. It is clear that Phelps Dodge achieved sustained c .t savings during the 1980-92 period, but Codelco and Freeport Indonesia did not.0 Partly due to appreciation of their currencies, there have been substantial nominal cost increases during the past six years. Except for Centromin, the cash cost differentials between these producers narrowed considerably by 1992. Figure 4: Cash Costs of Copper Production 100 0 ---Codelco - X- CflnIronn 0 ZCCM - - x- Phs Dodge - A - Fleeport 10 ZCCM and Centromin records are highly volatile, probably because high rates of inflation and exchange rate adjustments in these countries seriously distorted the estimates. Centromin costs for copper may be subject to greater error because copper is not its major product. 213 Annex I Figure 5: Labor Productivity in Copper Production 40 3w -7 -% 26 20 1980 1985 1 81199099 -0elo -- - Cermomin -O ~ o - 2cCM ~ -0 l - og -a•Fre 1601 120 10 .d- - - 194 1986 198999 909 -oel > - s nk(n )•-.- o DN - 0- -CC Jx. CP Ca~ 21 Annex I Figure 7: Labor Productivity in Aluminum Production 460 3600 1984 1986 1988 1990 1992 -- Ausiralla (Alcoa) - Brazl (MRDN) - Jomalca (Kaiser) Figure 8: Cash Costs of Copper Production in Constant Currencies and Exchange Rates 90 80 I- 70~ - Codeco o CM - Freeport Pl Dodge hdoneso Since the time series available for bauxite production costs and labor productivity are relatively short, it is difficult to make a judgment about the irend in efficiency improvements between private and public enterprises. Figures 6 and 7 suggest that Australia had lower cash costs and higher labor productivity than in BrAil and Jamaica. Brazil has made significant progress in the past three years in improving labor productivity and cutting costs; however, Brazil and Jamaica still have output per man-year 215 Annex I that is about half that in Australia. Even after allowing for differences in ore grade and other physical conditions, the data suggest room for efficiency improvements among state- owned bauxite producers. Although the cases examined above are limited to copper and bauxite, it gives some credence to the assertion that SOMEs are run inefficiently and that privatization will reduce the costs of production. However, the impact of this cost reduction on international prices will partly depend on exchange rate adjustments. If costs go down and export volume increases, the shadow price of foreign exchange will decline. To the extent this happens, the cost reduction will be neutralized. This type of change has already been observed in Chile. The large privately financed Escondida mine that came on- stream in 1989 is one of the world's lowest-cost copper producers and led the expansion of the private sector in Chile's mining industry. It made a significant contribution to improving Chile's balance of payments (other contributing factors include relatively high copper prices and increases in exports of other commodities). The resulting real appreciation of Chile's peso was a major factor in boosting Chile's average cash costs of copper production in nominal dollar terms by 19% during the 1989-92 period. Exchange rate realignment may be viewed a part of the long-term consequences of privatization. Concluding Remarks Privatization and liberalization of the mining industry in developing countries are relatively recent phenomena. These movements have made the most progress in copper mining and in downstream activities such as steel making. So far, all major copper-producing developing countries have plans or have expressed intentions to privatize SOMEs, and allow private sector majority participation in the development of state-owned lands. The changes also have started to affect bauxite, tin, lead and zinc, and some precious metals, but not yet iron ore in a meaningful way. Gradually, however, they are gaining momentum in all areas of mining. Records of the past three decades have shown that SOMEs in developing countries, even the mature ones, have been unable to achieve normal productive efficiency, keep abreast of technological advances, and cope with market adversities. Survival in today's highly competitive environment (measured by market share) will pressure these countries to liberalize the mining industry from state ownership and management. Privatization essentially makes available more mineral resources in developing countries to a larger of pool of investment capital, mostly from foreign sources. Thi, is a necessary and welcome change in the sense that these resources will eventually need to be brought onto world markets in order to meet increasing world demand for metals- From the world market point of view, the question is the speed and timing with which this process is accomplished. The forces working for and against privatization vary greatly across countries and between different mining industries. 216 Annex I Therefore, one can reasonably expect privatization to occur in a staggered fashion stretched out over a number of years. The timing of privatization also will be affected by metals prices. Once privatized, the timing and speed of exploration and development of new mining prospects will be dictated largely by market forces. Presently, copper is the only base metal that requires close attention with respect to the impact of privatization on long-term supplies and prices. Supply and demand projections for copper in this report show that large production increases are expected from developing countries such as Chile, Mexico, and Peru. We assume that most of the projects currently under study in Chile will be realized by 2005. The supply projections for Mexico and Peru allow for substantial production increases from privatization. It is assumed that current low prices of copper will delay implementation of new projects to 2005 and beyond. Increased exploration activity in Mexico has not yet turned up attractive large deposits. Known deposits in Peru have yet to be transferred to the private sector for assessmer.t and project development. Peru requires more time to create an investment climate comparable to that of Chile. 217 Annex II Recent Developments and Prospects for China's Metals Market Introduction China's rapid economic growth in past few years has been striking, particularly as the economies of industrial countries were in recession and the transitional economies of Eastern Europe and the FSU contracted substantially. Rapid economic growth has resulted in a sharp increase in both consumption and production of metals and minerals in China. However, the demand surge also led to a sharp rise in metal imports. Chinese imports of steel products in the first half of 1993 were almost four times larger than in the same period of 1992, and caused world steel export prices to rise by US$15-30 ton in an otherwise sluggish international market. This annex reviews recent developments in China's metals and minerals sector with a view to assess its prospects and potential impact on global markets. There have been significant changes in China's metals and minerals market. Domestic demand for several base metals and steel has grown exponentially in the past few years, and for ome metals even have caused international prices to rise. The state's central planning role in production and distribution has largely dissipated and the state's mandatory price system for metals was abolished in early 1993 except for 3% of nonferrous metal production, and gold and silver. Two metals exchanges for spot and futures trading opened for business in early 1992; another two have opened recently. In order to secure mineral supplies, China has adopted an active policy to attract foreign investment and to invest abroad. Despite the notable achievements, major problems remain in China's metals and minerals sector--insufficient capital investment, inadequate mining regulations, inferior equipment and technology, relatively low productivity, serious environmental pollution, relatively low ore grade in existing mines, bottlenecks in the supply of energy and transportation, and the lack of accurate and transparent market information and statistics. China's development strategy for its metals and minerals industry aims to promote investment in both domestic and foreign mineral resources, transform project financing from government funding to commercial loans, improve market infrastructure, improve enterprise management, reform property rights, and promote international cooperation. We assume that China will achieve real GDP growth rates of 8-9% in the next decade. Consistent with this assumption and the Eighth Five-Year Plan (1991-95) and the Ten- Year Development Strategy (1991-2000), production of non-ferrous metals is expected to reach a total of 4.!-5 million tons in 2000, or 7% p.a. growth over the 1991-2000 period. Steel producti.-n is projected to grow by 4.1% p.a. and to surpass 100 million tons by 2000. 218 Annex II Economic Development and Changes in Metals Market Economic development in China Over the 1978-92 period. China's real GDP grew by 8.5% p.a. By main sectors, the agricultural sector grew by 5% p.a., industry by 10.2% p.a., and services by 9.2% p.a.. Within the industry sector, mining and quarrying expanded by 9.7% p.a. and manufacturing grew by 10.2% p.a. The share of agriculture in GDP declined from 33.8% in 1978 to 20.6% in 1992, while the share of industry increased from 42.4% to 53.2%. The share of services rose slightly from 23.8% to 26.2%. These changes indicate that China is in a period of rapid industrialization. Rapid industrialization has more than doubled China's share of world industrial output since the economic reform began in 1978. China invested heavily in industrial modernization in the 1980s with the aim of enhancing productivity through technical change, economies of scale, and efficient resource allocation. Although the majority of industrial output (55% in 1990) is still produced by state-owned enterprises (SOEs), a number of liberalization measures (joint ventures, direct foreign investments, and "corporatizations" of SOEs) have moved many industrial sectors towards a free market economy. Changes in metals and minerals demand CONSTRUCTION AND MANUFACTURING. Rapid economic growth since 1978 has resulted in significant increases in consumption and fixed investment. Output in the industrial and construction sectors expanded rapidly and drove up demand for metals and minerals. Table I shows annualized rates of growth for 27 manufacturing sectors and the construction sector over the 1978-90 period. Total manufacturing output expanded rapidly during this period, including several metal-intensive sectors such as machinery and transport equipment. The highest growth was registered in construction (30.5% p-a.). INCOME ELAsncrrY. Table 2 shows estimates of i.come elasticities of metals demand (on a per capita basis) during the periods of 1961-77 and 1978-91. Before the commencement of economic reforms in 1978, the Chinese economy was under state control. Most metals and minerals were rationed to military and heavy industrial uses, and demand for other uses was largely suppressed. Income elasticities of metals demand during the 1961-77 period were relatively low. After 1978, elasticities are found to be much higher than in the first period. 219 Annex II Table 1: Growth Rates of Manufacturing and Construction Output, 1978-1990 Industrial Sector ISIC al % ht p.a. Total Manufacturing (300) 11.4 Food Products (311) 8.9 Beverages (313) 17.4 Tobacco (314) 11.1 Textiles (321) 11.5 Leather Products (323) 11.2 Wood Products, except Furniture (331) 6.4 Furniture, except Metal (332) 12.0 Paper and Paper Products (341) 15.4 Printing and Publishing (342) 10.8 Industrial Chemicals (351) 12.7 Other Chemicals (352) 13.8 Petroleum Refineries (353) 7.0 Misc. Petroleum and Coal Products (354) 4.9 Rubber Products (355) 9.5 Plastic Product (356) 16.6 Pottery, China, Earthenware (361) 11.1 Glass and Glass Products (362) 11.8 Other Non-Metallic Mineral Prod. (369) 10.9 Iron and Steel (371) 9.4 Non-Ferrous Metals (372) 11.2 Fabricated Metal Products (381) 6.2 Machinery, except Electrical (382) 9.5 Machinery Electric (383) 22.3 Transport Equipment (384) 15.3 Professional & Scientific Equipment (385) 13.4 Other Manufactured Products (390) 9.7 Construction c/ 30.5 at International Standard Industry Code. b/ Least squares trend growth rates c/ Floor space completed (1980-88). Source: UNIDO, Industrial Statistics; China Statistical Yearbook. SIGNIFICANCE IN THE woiuD. Table 3 shows the average annual growth rates of consumption and production of six base metals and steel over the 1978-92 period and their shares in the world total. China's share of world steel consumption rose from less than 6% in 1978 to 11.5% in 1992. China remains a significant steel importer. Copper production increased faster than consumption over the 1978-92 period, but China remains a net importer of copper. For aluminum and nickel, production grew faster than consumption to eliminate import needs. Among 220 Annex II Table 2: Income Elasticity of Metals Demand a/ Refined 1961-77 1978-91 Aluminum 0.44 2.51 Copper 0.90 2.63 Lead 1.14 3.74 Nickel 0.37 1.62 Steel 0.85 1.23 Tin 0.32 1.30 Zinc 0.91 1.01 a/ Estimated from double-log regressions between per capita metals consumption and income. Source: World Bank, International Economics Department. the seven metals, zinc consumption and production grew most rapidly. China has emerged as a net exporter of lead, zinc, and tin. Changes in metals and minerals supply CHANGES IN PRODUCTION. Prior to 1978, the metals and minerals sector were given a high priority but production could not meet domestic demand due to insufficient capital investment, energy scarcity, outdated technologies, and the lack of high-grade ore reserves. During the first few years of economic reform, the policy changed to "export petroleum to support imports of metals." As a result, China became the second largest metal-importing country after the United States. Figure 1 shows imports of aluminum, copper, and steel over the 1978-92 period. Imports of metals reached exceptionally high levels in the mid-1980s. Increases in metals imports and the collapse in crude oil prices in 1986 made the "oil for metal" strategy difficult to Table 3: Growth Rates and Shares of China in World Total Base Metals and Steel, 1978-1992. Consumption Production Growth Rate 1978 Share 1992 Share Growth Rate 1978 Share 1992 Share (% p.a.) (%) (%) (% p.a.) (%) (%) Aluminum 4.6 3.7 4.6 7.5 2.4 4.8 Copper 4.2 3.7 5.9 5.5 3.1 5.6 Lead 2.2 3.8 4.5 5.1 2.9 5.1 Zinc 8.3 2.9 7.2 9.5 2.7 7.5 Tin 3.9 4.5 8.1 3.1 7.8 14.1 Nickel 5.3 2.7 3.2 7.6 1.7 3.3 Steel 4.8 5.9 11.5 6.6 4.4 11.1 Source: World Bank, International Economics Department. 221 Annex II continue. Since then, development of domestic metals and minerals (particularly, aluminum, copper, and steel) became a high priority. Figure 1: China's Metal Imports 30 5o 25 ~400 2 197 199 110 1100 5 0 0 1978 1980 1982 1984 1986 1988 1990 1992 Aluminun - or - Steel Many Chinese metallurgical plants were built with Russian-style technologies at the end of 1950s and are significantly behind the technological standards in the industrial countries, particularly in areas of computerization and environmental pollution control. Of more than 300 nonferrous metals mines in operation in China, only a dozen are large-scale mines with output of more than 1 million tpy. About 80% of mine production comes from small- and medium-sized mines with outputs of 150-500,000 tpy. In recent years, there has been technical progress; advanced technology and equipment have been acquired through imports; and international metallurgical information and technical know-how have been studied. China's metals industries have made significant progress in polymetallics, high-purity metals, rare earths, and zinc metallurgy. INDUSTRIAL STRUCTURE. Before 1980, production of China's metals and minerals was controlled by the Ministry of Metallurgical Industry (MMI), and foreign trade by China National Metals and Minerals Import/Export Corp (Minmetals) under the Ministry of Foreign Economic Relations and Trade (Mofert). In 1980, MMI set up its own foreign trade agency, China Metallurgical Import/Export Corp (CMIEC) to export iron and steel. In 1983, the Department of Non-Ferrous Metals Industry within MMI was split off from MMI and became China National Non-Ferrous Metals Industry Corporation (CNNC). In 1984, CNNC set up its own foreign trade agency, the China National Non-Ferrous Metals Import/Export Corp (CNIEC). These deregulation and decentralization measures introduced competition and efficiency incentives into China's metals and minerals industry, particularly in the area of foreign trade. 222 Annex II Competition heated up when provincial branches of Minmetal, CMIEC and CNIEC, and individual producers were allowed to export directly. Because agencies and their provincial branches were allowed to retain a certain percentage of export proceeds in foreign currency, competition to export became fierce. There were cases of different branches of the same agency competing to export minerals from the same mine or plant. As a result, China's exports of certain minerals flooded international markets and drove down prices. Recently, exports started to stabilize. OVERSEAS INVESTMENT. The main purpose of mine investment overseas is to acquire deposits of high-grade and low-cost deposits to complement domestic resources and ease bottlenecks along the mining, concentrating, smelting, and refining chain. Given that 56 out of 147 mines under CNNC control are exhausted, overseas souicing of metal ores will be increasingly important in the future. CNNC currently has about Reminbi ("RMB") yuan 5-6 billion (US$1 billion) a year for investment abroad, mostly for copper mines. In the past several years, CNNC has sent more than ten teams to Chile, Peru, Zambia, United States, and the FSU seeking investment opportunities in copper mines. China's steel industry is also very active overseas and has invested in Australia, Peru, and Brazil. Overseas mine investment by China's metals industry can take three different forms-own investment, joint investment, and shareholding. The scarcity of funds makes it difficult for China to invest on its own, although preferential loans from the central government and loans from a yet-to-be-established development bank can be a solution. Joint investments will reduce the financial burden, and may provide a better operating environment and stable management. The Chinese government supports overseas mineral investments by offering low- cost loans wherever necessary; seeking bilateral treaties with foreign governments; establishing investment warrants; and by giving favorable treatment in tariff, taxation, and foreign currency operations to the mining sector. Changes in metals and minerals market structure DISTRIBUTION. Until the mid-1980s, China's metals and minerals market was under strict government control, and production, shipments, and prices were all fixed by the government. Prices were extremely low for most metals and minerals. In the mid-1980s, a secondary system of parallel market prices was introduced for extra production beyond the planned requirements. Introduction of the dual price system was designed to gradually free metals and minerals markets. However, the system resulted in confusion in the markets and created opportunities for corruption, and was finally abolished in 1993. Table 4 presents a comparison of state mandatory prices and free market prices for five base metals in 1988 and 1992. The differences between the free market and mandatory prices for these base metals were 223 Annex II substantial in 1988. Mandatory prices were raised several times in 1989 and 1990. In 1991, the gap between the two sets of prices in the dual price system was reduced significantly. METAL EXCHANGE MARKETS. A significant event for China's metals and minerals sector was the creation of two metals exchanges, one in Shenzhen and the other in Shanghai. According to Chinese officials, the exchanges have performed well since their inauguration. Currently, prices of almost all base metals shipments (97%) from CNNC to domestic users are based on quotations from one of the exchanges. The Shenzhen Metal Exchange (SME) opened its floor for trading in January 1992. Metals traded include copper, aluminum, lead, zinc, nickel, tin, magnesium, and antimony. There are cash and futures contracts for each metal. Trading procedures follow a combination of rules on the London Metal Exchange (LME) and the New York Commodity Exchange (Comex). The Shanghai Metal exchange (SHME) was established by the Ministry of Materials and Equipment (MME) and the Shanghai city government. Unlike CNNC which oversees the non-ferrous metal production, MME administers the distribution of raw materials including metals. SHME opened for spot trading in May 1992, and futures trading in July 1992. Metals traded on the exchange include copper, aluminum, tin, lead, zinc, nickel, and pig iron. Unlike SME, SHME adopted computer trading procedures. SHME has expanded its business significantly since its opening. In the first year, the daily turnover increased from 2 billion RMB yuan (US$250 million) to 20 billion RMB yuan (US$2.5 billion), and the percentage of phybical delivery dropped from 85% to 4%. Currently, SHME has 55 members representing 1,700 clients. Foreign companies are not allowed membership on the exchange because of three obstacles: (i) the quality of Chinese metal is not up to international standards; (ii) rules of futures trading are not complete; and (iii) SHME uses RMB yuan which is not fully convertible. However, given the rapid development of the exchange in just one year. foreign companies are confident that they will be allowed membership in the near future. Individual Metals and Minerals Aluminum ALUMINUM CONSUMPTION. China's aluminum consumption has grown modestly since 1978, with annual growth of 5%. Demand for aluminum for consumer durables and residential building construction has been largely suppressed. Aluminum consumption in 1992 is estimated at I million tons, ranking China as the sixth largest consumer in the world. Per capita aluminum consumption in China is only about 0.8 kg, or about one sixth of the world average. 224 Annex II Table 4: Mandatory vs. Free Market Prices of Base Metals (1988 and 1991, $/ton) a/ Mandatory Free Market Difference International (1) (2) (2)-(1) (3) S--------1988 ------------- --------------- Aluminum 1,290 4.030 113.9% 2,551 Copper 2,015 4,836 87.5% 2,602 Lead 744 1.209 48.5% 656 Zinc 967 2,042 74.7% 1,242 Tin 7,657 11,015 36.4% 7,050 ------- -------------------- 1991 ------------------ ----- Aluminum 1,277 1,653 25.8% 1,302 Copper 1,822 3,100 53.1% 2,339 Lead 667 620 -7.3% 558 Zinc 930 1,368 38.6% 1,117 Ti n 6,857 6,293 -8.6% 5,477 at Converted from RMB Yuan to US$ using official exchange rates. Source: China National Nonferrous Metals Industry Corp., Research Department, and World Bank, International Economics Department Around 32% of aluminum is consumed in metal products, 17% in construction, 13% in electricity, 10% in transport, 8% in food packaging, and 5% in machinery. More than 70% of China's aluminum consumption goes into intermediate products. In the past, the Chinese government imposed restrictions on aluminum usage in residential buildings, consumer durables, and aluminum soft drink cans. In OECD countries, about 70% of aluminum consumption is in final consumption such as construction, packaging and containers, and automobiles. This dissimilarity suggests large potential growth for aluminum consumption in China. BAUXITE AND ALUMINA PRODUCrION. China's bauxite reserve is estimated at 1.6 billion tons, of which 70% is unexploited. Most ores exist as monohydrated bauxite of the diaspora type with alumina content of 55-70%. Extraction of alumina from diaspora is more difficult than from gibbsite because the ore is harder and contains more impurities. The specific refining technology developed in China is relatively energy intensive, thus the cost of refining is high. The largest proven bauxite reserves are in Pingguo, Guangxi province, estimated at 800 million tons. Other large mines are located in Shanxi, Henan, Guizhou, and Shaanxi. More than two third of China's bauxite production comes from the ten major state-owned mines. In most cases, major bauxite mines in China are a part of a vast complex that includes alumina refinery, aluminum smelter, and energy supply. 225 Annex II Because of the high intensity of energy use in alumina refineries, alumina production is concentrated mainly in the southwest and middle reaches of the Yellow River where several large hydroelectric power stations are situated, and also in northern and northwestern China where large coal fields are located. Currently, the bottleneck in China's aluminum industry is alumina production capacity, which is about 1.7 million tons. The ratio of alumina capacity to aluminum capacity is only half of the world average. This bottleneck has become increasingly tight in recent years. China had to import 400,000 tons of alumina in 1992. Current plans call for a doubling of alumina capacity to 3.4 million tons by 1995. Significant expansions of alumina capacity are planned in Shanxi, Guizhou, Henan, Hebei, and Guangxi. ALUMINUM PRODUCTION. China's aluminum production grew by 7.8% p.a. from 1978 to 1992 and surpassed I million tons in 1992. There are four major aluminum smelters in China, each with an annual capacity of more than 100,000 tons. Other plants tend to be small with capacities of around 25,000 tons. The major cost component in aluminum production is electricity. Electricity consumption in aluminum production is currently 1,650 kwh/ton and accounts for about 35% of total costs of production, while the international standard is about 15-20%. Future aluminum production facilities in China are likely to be located in areas where electricity can be supplied at low cost. A feasibility study is under way for a 500,000 tpy aluminum smelter in Shanxi province where energy costs are among the lowest in China. Development of bauxite, alumina, and aluminum has been given a high priority since 1983. China invested the equivalent of US$2 billion in aluminum capacity during the 1983- 90 period, or 44% of total investment in non-ferrous metals. About 40% of the investment was in aluminum smelters totalling about I million tons. China expects to export some of the aluminum to other countries. According to the Eighth Five-Year Plan, aluminum production capacity should be around 1.5 million tpy by 1995. A major obstacle for China's aluminum industry is the electricity cost. Without a significant decline in electi: city prices, it is thought that China's aluminum production will not be competitive internationally. ALUMINUM MARKET OUTILOOK. Table Al presents projections for bauxite, alumina and aluminum production, net trade, and aluminum consumption. After posting a 28% increase in 1992 and estimated 18% gain in 1993, aluminum consumption is expected to grow by 4.8% p.a. in the rest of 1990s, and then slow to around 3% p.a. in the first half of 2000s. By 2005, Chinese aluminum consumption is expected to reach 2 million tons. Aluminum production is expected increase faster than consumption, given the high priority the industry receives from the government in order to reduce imports. However, China will remain a net importer of bauxite and alumina. 226 Annex II Copper COPPER CONSUMFTION. China's refined copper consumption exceeded its production for past thirty years. Despite rapid growth of consumption (5% p.a. over this period), per capita copper consumption remains at only about 0.5 kg, far less than that of the industrial countries (8 kg per capita) and some developing countries. In 1992, China's copper consumption stood at 820,000 tons, or 6% of the world total. Power generation and transmission, automobiles, machinery, and consumer durables are the major consumers. Electric wires and cables account for 45% of consumption. It is estimated that an increase in power generation by 10 million kw requires I million tons of copper and aluminum. COPPER PRODUCrION. China is the world's fifth largest copper producer and has the fourth largest ore deposits. However, domestic mine production is insufficient to meet demand. China is a net importer of copper of various forms, including concentrates, blisters, refined copper, and copper scrap. China's copper ore is generally low grade, containing 0.6-1 % copper. Forty five percent of China's copper ores are porphyritic with copper content of less than 0.5%. According to CNNC, China will put more emphasis on developing new smelting and refining capacities using imported concentrates and blister, than on development of domestic copper mining capacity. Copper ore production has been increasing steadily over the 1978-92 period with an average annual growth rate of 5.1%. Ore production in 1992 was 309,000 tons metal content. The largest copper mine is in Dexing, Jiangxi province, which accounts for 25% of the country's ore production. Other major mines are located in Tongling (Anhui province), Baiyin and Jinchuan (Gansu province), Daye (Hubei province), Zhongtiao Shan (Shanxi province), and Dongchuan (Yunnan province). Discoveries of new deposits have been reported in Sichuan, Tibet, and Xinjiang. But these are situated in remote areas where transportation is a major problem; their development is not expected at least for the next 20 years. In addition to low copper content, China's copper deposits are relatively small and buried deep. The cost of extraction is estimated at far above international levels, after allowing for by-product credits (mostly gold and silver). Most provinces and autonomous regions that have copper mines also operate smelters and/or refineries to process locally produced concentrates. However, there are a number of smelting and refining facilities that lack backward integration. For example, Beijing and Shanghai municipalities operate refineries that source secondary copper or blister from other regions or overseas. Production capacities of blister and refined copper have exceeded that of copper ore by about 40% in recent years. A major portion of blister production comes from a dozen smelters that produce no more than 50,000 tpy. They are too small to benefit from economies of scale. There are about 15 small copper refineries. Refined copper production is expected to grow by 3.3% p.a. over the forecast period. Copper deposits located in Xinjiang and Tibet are too remote and are less likely to be 227 Annex II developed before the end of the century. Newly built smelters and refineries that depend on imported copper ores will be strategically located on transportation lines of future supply sources of copper concentrates and blisters. One such facility is to be built in Huludao, Liaoning province, in the northeast part of China and close to copper ore mines in Mongolia and the Russian Far East. In August 1993, CNNC reached an agreement with Chita Mining Company Ltd., a US registered mining company that won the mining rights in the Chita region of the Russian Far East, to construct a 400,000 tpy copper mine, of which 260,000 tons will be exported to China. EXTERNAL TRADE IN COPPER. Given the forecast gaps between copper production and consumption, and between refined copper production and mine production, China will need to import large quantities of refined copper, copper concentrates, and blisters. It is estimated that import requirements of refined copper will be around 280,000 tons by the year 2000 (Table Al). In all, about half of China's copper demand by the year 2000 is likely to be met by imports, in the form of refined metal, blister, or concentrates. Lead and zinc LEAD AND ZINC CONSUMPTION. Just over 25% of lead consumption in China is for batteries, versus 75% in industrial countries. The rest of lead is used for industrial machinery and cable sheathing. Galvanizing accounts for 21% of zinc consumption in China, compared with over 45% in industrial countries. A major reason for these differences is the relatively underdeveloped automobile industry in China. It is obvious that there will be significant demand gri-wth for lead and zinc once China's automobile industry starts to take off. LEAD AND ZINC ORE PRODUCTION. China has the world's largest lead and zinc reserves, estimated at 70-100 million tons of ores for both metals combined. China is the world's fourth largest refined zinc producer and sixth largest refined lead producer. China's main lead and zinc deposits are located in Gansu, Yunnan, Inner Mongolia, Guangdong, and Qinghai. The zinc reserves are generally richer in metal content than lead reserves (the zinc-lead ratio is 2.5:1). Most of the lead and zinc deposits are medium to small size and require relatively expensive underground mining techniques. Current levels of production of lead and zinc ores are sufficient to supply China's smelting and refining facilities, and the surpluses are being exported. LEAD AND ZINC REFINED METAL PRODUCTION. China's lead and zinc industries are vertically integrated from mining to smelting and refining. Most lead and zinc ores are concentrated and refined at the mine site. Refined lead production has almost doubled between 1978 and 1992, from about 170,000 tons to 340,000 tons. Zinc production, however, has nearly quadrupled between 1978 and 1992, from 150,000 tons to 550,000 tons. 228 Annex II MARKET OUTLOOK POR LEAD AND ZINC. Table Al presents projections for China's lead and zinc mine and refinery production, refined lead and zinc consumption, and not trade. Consumption of lead is expected to grow faster than production, with net exports of lead declining over the forecast period. Domestic production of lead ore will be sufficient to supply China's refined lead production, and net trade in lead ore will remain insignificant. Zinc consumption is expected to grov, faster than production, and net exports of zinc should decline over the forecast period. Tin ORE AND REFINED TIN PRODUCTION. China has the world's largest tin reserves estimated at between 500,000 to 2.5 million tons metal content. Major mines are located in Yunnan, Guangxi, Jiangxi, Guangdong and Hunan. Mine production capacity amounts to 40,000 tons (metal content). China's major tin smelters and refineries are located where major mines are situated except for the Shanghai No. 2 smelter. Annual production of refined tin is somewhat less than ore production. The surplus (about 5,000 tpy) has been exported. China's production costs are relatively high because of its low ore grades. China's current tin production capacity is believed to be capable of meeting domestic demand for the foreseeable future. EXTERNAL TRADE. China has been a major exporter of tin concentrates (5-10,000 tpy) and refined tin (10,000 tpy) to the international market. Since 1989, export taxes have been applied to tin concentrates in an effort to reduce concentrate exports. China is expected to remain a major exporter of refined tin, exporting more than one third of its production (Table Al). Tin ore production will be more than sufficient to supply domestic refineries, and it is likely that China will increase its exports of tin concentrates. Nickel NICKEL CONSUMPTION. China's nickel consumption has doubled from 20,000 tons in 1985 to 40,000 tons in 1992. The nickel consumption pattern by different end-users in China is similar to that in industrial countries. About 67% of nickel is used for stainless steel production and the rest for plating and nickel alloys. Nickel demand for stainless steel production is expected to increase substantially. A proposed 200,000 tpy stainless steel plant in the Fujian province would require an additional 13,000 tpy of primary nickel. NICKEL RESERVES. It is estimated that China has 7.6-9 million tons (metal content) of tickel ore reserves. About 70% of its reserves are found in a single deposit, Jinchuan, in Gansu province. Jinchuan is one of the world's largest known nickel deposits after the Sudbury in Canada. Like Sudbury, its four deposits are polymetallic and contain about 500 million tons of ore (gross weight) averaging 1.2-1.3% nickel (in sulphide) and 0.8-0.9% copper. About 80% of 229 Annex I China's nickel ore production originates from Jinchuan. Other major nickel mines are located in Jilin, Sichuan, and Shaanxi. REFINED NICKEL PRODUCTION. Nickel industry in China is vertically integrated. In 1991, Jinchuan produced about 24,000 tons of refined nickel, out of China's total production of 29,000 tons. Other smelting and refining capacities are in the Sichuan province with a total annual production of 4,000 tons. Capacity at Jinchuan was tripled from 8,000 tons in 1978 to 25,000 tons in 1991. The second-phase expansion with an investment of US$300 million increased Jinchuan's production capacity to 40,000 tons. However, the capacity is being underutilized because mines at Jinchuan cannot produce enough feed for its smelters due to difficult mining conditions, and storms and earthquakes in the mining area. Plans for future increases in nickel production are centered exclusively in Jinchuan. EXTERNAL TRADE OF NICKEL. Before the start of large-scale mining in Jinchuan in the mid-1970s, China imported substantial quantities of nickel, first from Cuba and the FSU and later from Canada. Since 1985, imports and exports of nickel from China have been erratic and information is limited. According to statistics on trade of primary nickel, China was active in exporting nickel during the 1986-88 period. Those exports reportedly were necessary to finance the second-phase expansion in Jinchuan. Since then, China's nickel exports almost disappeared due to growing domestic demand and imposition of a 40% export tax. Recently, China has entered into long-term barter agreements with Russia and Cuba to import primary nickel. Nickel concentrate imports are also likely because mine production in Jinchuan is insufficient. However, due to its remote location, the cost of transportation to Jinchuan will be substantial and it is unlikely that imported nickel concentrates would continue on a long-term basis. OUTOOK FOR THE NICKEL MARKET. China's nickel production is projected to grow faster than consumption (Table Al). However, China will continue to be a net importer of refined nickel. Because of the availability of high-quality nickel ore deposits, China is expected to increase its nickel ore production significantly and maintain self-sufficiency in the years ahead. 230 Annex II Gold and silver GOLD PRODUCrON. China is one of the world's major gold producers and is the largest in Asia. Annual production capacity is estimated at 80-110 tons. The main purpose of increasing gold production in China has been to repay its foreign debt. Gold use in industry and jewelry, and as an instrument of money supply management through sales in retail markets, have gradua'ly become popular. Gold production in China is controlled by the China National Gold Corporation (CNGC), which is under MMI. It is responsible for mine production, refining, and selling of gold to the People's Bank of China (PBOC), the central bank, which in turn controls all aspects of gold usage through its division of Gold and Silver Management. CNGC controls some 300 mines and refineries, and CNNC supervises non-ferrous metal producers who produce gold as a by-product. Gold is mined in every province and region. It is believed that China has at least 400 tons of gold in proven deposits. Shandong province alone accounts for 25% of China's gold production; Henan, Heilongjiang, Liaoning, Inner Mongolia, Shaanxi, Hebei, and Jilin together account for about 55%. It is estimated that China produced 35 tons of gold in 1979 and 119 tons in 1991, with an average annual growth rate of 10.2% over the 1979-91 period. Market liberalization has also reached the traditionally secretive gold and silver industries. Domestic gold prices were brought in line with international prices in September 1993 by PBOC. The old prices were fixed by PBOC at about half of international prices. The low prices were the main reason for the financial losses of China's gold producers and rampant gold smuggling in recent years. The change in pricing policy is likely to stimulate foreign investment into China's gold industry. About 40-50 tons (metal content) of low-grade gold reserves are now open to foreign investment. SILVER PRODUCTION. Silver reserves and mines are located in provinces of Guangdong, Jiangxi, Inner Mongolia, Sichuan, and Jiangsu (as a by-product oi dtd and zinc); Yunnan (as a by-product of copper); Guangxi, Henan, and Shandong (as a by-product of gold); Gansu (as a by-product of nickel); and in Shaanxi (as a by-product of aluminum). Silver statistics are more difficult to obtain than gold. It is estimated that silver production in China in 1990 was 690 tons. Steel and iron ore STEEL CONSUMPTION. China's apparent steel consumption grew by 7% p.a. between 1978 and 1992. Steel consumption increased by more than 15% in 1992, due to rapid growth in GDP (12.8%), industrial production (20.8%), and fixed investment (28.2%). In the first half of 1993, the growth accelerated. The extraordinary increase in China's steel product imports pushed up international steel product prices by $10-30 tons in the first half of 1993. It is likely that in the 231 Annex II next 10 to 15 years, China's steel consumption wil! continue to grow faster than production and the balance will be met by imports. STEEL PRODUCTION. China now possesses the world's third largest steel industry and is poised to take over the second place in a few years. Up to 1991, China had over 2,000 steel enterprises. There are four integrated steel works with annual capacity of 1-4 million tons, and 38 steel works with annual capacity of 100,000 tons to I million tons. The remainder are small-sized plants serving local markets. Steel production in China has been increasing rapidly, from 32 million tons in 1978 to over 81 million tons in 1992, for an average annual growth rate of 6.6%. Production for 1993 is estimated at over 87 million tons. Durint this period, the structure of steel production has also changed. The share of output from basic oxygen furnaces (BOF) increased from 34.4% in 1978 to 60% in 1992. The share of output from the open hearth furnaces (OHF) fell from 35% to 17%, and the share of continuous casting increased from 3.5% to 30%. Product mix and quality have also improved in recent years. However, the Chinese steel industry lags far behind modem steel-producing countries in terms of technology. The steel industry in China has been given a top priority by the government along with energy, transportation, communication, and other raw materials. The goals for the steel industry according to the Eighth Five-Year Plan include: (i) expanding steelmaking capacity to over 100 million tpy by year 2000; (ii) achieving international product quality standards for about 50-60% of the output; (iii) increasing the variety of products in order to reduce dependence on imports for products such as sheet, plate, tubs, and pipes; (iv) improving energy and raw material efficiency in production; (v) improving technology and boosting the share of continuous casting to 50% by 2000; and (vi) reducing environmental pollution. In order to reach those targets, the government initiated a new round of economic reform measures. Domestic steel prices were completely freed at the beginning of 1993. Steel companies are now given more authority in planning production and sourcing raw materials. About $6 billion was invested during the 1978-92 period to expand and modemize the steel industry. Three new integrated steel mills will be built before the year 2000 in the provinces of Shandong, Zhejiang, and Guangdong. In addition to large-scale greenfield projects, the government plans to invest in technology and process improvements. About two thirds of the projected production increases will come from renovation and expansion of existing plants. IRON ORE SUPPLY. In order to provide sufficient raw materials to its steel industry, China has traditionally placed high priority on the development of its iron ore industry. The iron ore and steel industries in China are vertically integrated. Most integrated steel complexes in China have their own local iron ore mines. The average growth rate of iron ore production over the 1978-92 period was 5.2% p.a.. China mined about 120 million tons of iron ore in 1992. China's iron ore resources are estimated at 9 billion tons, but 98% of the deposits have low grade ores with an average iron content of 32% and require beneficiation processes to boost iron 232 Annex II content to about 60%. Iron contents for Australian and Brazilian iron ore arc above 60%. Unfavorable physical characteristics of the iron ore mines remain an obstacle for the rapid expansion of China's steel industry. In view of the easy access to good-quality iron ore in international markets, the Chinese government has adopted a policy of utilizing both domestic and foreign resources, and has encouraged the steel industry to secure overseas iron ore supplies. Chinese imports of iron ore have increased on average by 2 million tpy since 1982 and reached close to 25 million tons in 1992. About 20% of China's steel production uses imported iron ore. The reliance on imported iron ore is expected to increase to 35% by the year 2000, when iron ore imports will reach 40-50 million tons. Most imported iron ore will be used by four major steel complexes along the Yangtze river because of advantages they have in transportation. Due to lack of deep-water ports and inadequate inland roads, transportation costs account for about one half the total delivered c.i.f. price. This makes imported iron ore 30% more expensive than domestically produced ore. About 55% of iron ore imports come from Australia, 20% from Brazil, and 10% from India. China is making efforts to diversify supplies to include producers from Peru, Venezuela, and South Africa. China's overseas investments in iron ore mines include: (i) Channar joint venture project in Australia; (ii) the acquisition of Hierro Peru; (iii) joint venture with Portman Mining to develop Koolyanobbing iron ore mine in Australia; and (iv) a joint venture with Brazil's CVRD to develop a new mine at Carajas. STEEL AND IRON ORE MARKET OUTLOOK. Table Al shows forecasts of China's steel and iron ore production, net trade, and steel consumption. Before 1990, one of the most often quoted goals for the steel industry was that s eel production should surpass the 100 million ton mark by 2000. However, during the first two years of the 1990s, this target was revised downward to 80 million tons. However, the 80 million ton target was too low and was exceeded in 1992. The government again revised the plan upwards to 100 million tons. According to our simple extrapolation, a modest growth rate of 3.6% p.a. over the period 1992-2005 would be more than en ugh to accomplish that goal. In fact, China's steel production by the year 2000 is expected to be over 110 milhan tons. Steel consumption is expected to increase faster than production, leaving China as a net importer of steel in the forecast period. Because of low-grade iron ore deposits and high production costs associated with iron ore mining, domestic production of iron ore in China is expected to grow relatively slowly (1.9% p.a.). Domestically produced iron ore will serve steel works located inland where imported iron ore generally carries higher transportation costs. Iron ore imports will increase gradually, and by the year 2000, the share of imported iron ore to domestic production is expected to exceed 35%. 233 Table AI: outlook for China's Metal Production, Consumption and Net Trade Actual Projected Growth Rates u/ Averages *********.-----. 1992- 1992- 1969-71 1979-81 1990 1991 1992 b/ 1993 1994 1995 2000 2005 1970-91 2000 2005 ------------------------------------------('000 T-ns)----------------(M p.a.)--------- Bauxite (MU) a/ Production 500 1,667 4,200 4,200 4,250 5,110 6,115 6,850 7,765 8,565 10.1 7.5 5.4 Net Trade 22 370 680 542 (484) (422) (215) (278) (90) (70) 15.2 - Alunina (MC) b/ Production 277 900 1,200 1,200 1,578 1,844 2,110 2,324 2,951 3,515 7.0 7.8 6.2 Net Trade 3 12 (14) (20) (151) (182) (237) (344) (203) (166) Aluminum (MC) Consumption 223 563 650 800 1,060 1,265 1,383 1,500 1,750 2,000 6.1 6.3 4.9 Production 137 353 850 900 1,030 1,180 1,330 1,480 1,750 2,000 9.0 6.6 5.1 Net Trade (87) (210) 200 100 (30) (85) (53) (20) 0 0 - - Copper Ore (Kc) Production 107 165 296 295 309 300 300 305 450 600 4.8 4.7 5.1 Net Trade 0 (17) (68) (88) (53) (105) (150) (220) (250) (275) - * Copper Blister (MC) Production 98 178 358 385 419 426 482 577 750 900 6.5 7.3 5.9 Net Trade 9 45 10 20 39 (3) (90) (50) (70) (100) 3.6 D Copper (NC) Consumption 180 367 512 590 820 845 870 900 1,155 1,400 5.7 4.3 4.1 Production 127 295 558 560 622 690 720 750 872 1,150 7.1 4.2 4.7 Net Trade (56) (122) (17) (105) (258) (300) (150) (150) (283) (250) Lead Ore (MC) Production 110 158 315 320 287 360 380 400 480 617 5.1 6.4 5.9 Net Trade NA NA (1) (4) 6 7 4 0 0 0 - - -21.7 Lead (MC) Consumption 162 212 250 250 240 320 350 380 466 612 2.1 8.3 7.2 Production 120 173 287 296 342 353 377 400 480 617 4.3 4.2 4.5 Net Trade NA NA 30 7 72 33 27 20 14 5 - -20.3 -20.5 Zinc Ore (MC) Production 100 155 619 710 706 662 700 743 925 1,140 9.3 3.4 3.7 Net Trade NA (2) 36 32 22 18 15 13 0 0 Zinc (NC) consumption 113 203 500 530 551 625 673 720 916 1,132 7.3 6.4 5.5 Production 100 158 526 577 648 644 685 730 925 1,140 8.3 4.4 4.3 Net Trade (62) (47) 13 24 78 19 13 10 9 8 - -26.8 -17.4 Table AI (Cont.)s OutLok for China's Motel Production, Conslmption and Net Trada Actuel Projected Grouth Rates a/ Averages ............ 1992- 1992- 1969-71 1979-81 1990 1991 1992 b/ 1993 1994 1995 2000 2005 1970-91 2000 2005 ......................-....0........... 000 Tons) -.... -------------------.-- --.--.( p.a.j-... Tin Ore (MC) Production 22.0 16.3 36.0 34.0 34.8 35.6 36.4 37.1 41.1 45.0 2.1 2.1 2.0 Net Trade 0.0 0.0 16.0 11.0 7.3 7.6 5.0 8.3 9.7 10.8 . 3.5 3.0 Tin (MC) Conumption 13.0 11.0 18.0 17.0 17.3 17.5 17.8 18.1 19.6 21.2 1.3 1.6 1.6 Production 22.0 16.0 28.0 27.0 27.5 27.9 28.4 28.9 31.4 34.2 1.0 1.7 1.7 Net Trade 5.7 4.0 10.0 16.0 25.0 10.4 10.6 10.8 11.8 13.0 4.9 .9.4 -5.1 Nickel Ore (MC) Production 0.0 11.0 33.2 30.0 34.9 39.8 44.6 49.5 65.9 83.2 . 8.0 6.7 met Trade MA NA NA MA NA 0.0 0.0 0.0 0.0 0.0 . • - Nicket (MC) Comuption 19.0 18.7 27.0 35.0 40.0 43.0 46.1 49.1 66.3 85.1 2.9 6.3 5.8 Production 0.0 11.3 28.0 28.0 29.0 34.4 39.7 45.1 60.9 78.2 - 9.3 7.6 Net Trade NA NA 3.6 NA NA -8.7 -6.3 -4.0 -5.4 -6.9 . . . [ron Ore (MC) Production 23,400 51,417 59,378 61,354 68,578 70,002 71,314 73,352 80,179 87,512 4.6 2.0 1.9 Net Trade NA 2,807 9,036 11,688 15,837 18,185 19,531 20,859 27,762 35,887 - 7.0 6.3 Steel (Crude) et Conumption 21.422 42,356 68,419 71,042 82,870 95,252 97,509 101,696 117,983 133,692 5.7 4.4 3.7 Production 18,333 35,736 66,349 71,000 80,037 87,000 90,794 95,017 111,486 127,265 6.4 4.1 3.6 Net Trade (3,089) (6,620) (2,070) (42) (2,833) (8,252) (6,716) (6,679) (6,497) (6,426) - . . ai Cross weight. bi Motal content. ci Crude steel quivalent. source: WorLd Uank, International Economice Deprtmmnt. Table Al (Cont.)s Outlook for China's Metal Productton, Conumption and Met Trade Actual Projected Growth Rates at Averages ..***.****.***** 1992- 1992- 1969-71 1979-81 1990 1991 1992 b/ 1993 1994 1995 2000 2005 1970-91 2000 2005 ********('000 Tons) ------------------------------- ---------tz p.a.)------ Tin Ore (MC) Production 22.0 16.3 36.0 34.0 34.8 35.6 36.4 37.1 41.1 45.0 2.1 2.1 2.0 Net Trade 0.0 0.0 16.0 11.0 7.3 7.6 8.0 8.3 9.7 10.8 - 3.5 3.0 Tin (C) Consumption 13.0 11.0 18.0 17.0 17.3 17.5 17.8 18.1 19.6 21.2 1.3 1.6 1.6 Production 22.0 16.0 28.0 27.0 27.5 27.9 28.4 28.9 31.4 34.2 1.0 1.7 1.7 Met Trade 5.7 4.0 10.0 16.0 25.0 10.4 10.6 10.8 11.8 13.0 4.9 -9.4 -5.1 .................................................................................................................................... Nickel Ore (KC) Production 0.0 11.0 33.2 30.0 34.9 39.8 44.6 49.5 65.9 83.2 - 8.0 6.7 Net Trade MA MA NA NA MA 0.0 0.0 0.0 0.0 0.0 Nickel (NC) Consuiption 19.0 18.7 27.0 35.0 40.0 43.0 46.1 49.1 66.3 85.1 2.9 6.3 5.8 Production 0.0 11.3 28.0 28.0 29.0 34.4 39.7 45.1 60.9 78.2 - 9.3 7.6 Met Trade MA MA 3.6 NA MA -8.7 -6.3 -4.0 -5.4 -6.9 - - - Iron Ore (MC) Prod=ction 23,400 51,417 59,378 61 354 68 578 70 002 71 314 73,352 80,179 87,512 4.6 2.0 1.9 Not Trade MA 2,807 9,036 11:688 15,837 18,185 19,531 20,859 27,762 35,887 - 7.0 6.3 LA SteeL (Crude) c/ Consumption 21,422 42 356 68,419 71,042 82,870 95 252 97 509 101 696 117,983 133,692 5.7 4.4 3.7 Production 18,333 35,736 66,349 71,000 80,037 87,000 90,794 95,017 111,486 127,265 6.4 4.1 3.6 Net Trade (3,089) (6,620) (2.070) (42) (2,833) (8,252) (6,716) (6,679) (6,497) (6,426) - - - O-----meI '" * ---------------------------*------------------------------------------------------------- a/ Gross neiSht. b/ Metal content. c/ Crude steel equivalent. source: World Bank, InternationaL Economics Department. - 1, , -