Monday, August 15, 2022

Not a wise decision for mining houses to stockpile, says observer

Several of Botswana mining houses have halted production as the demand for commodities plummeted leading to massive lay offs and suspension of operations.

The move by the miners have led to questions being asked on whether it would be economic for miners to continue operations and stockpile and keep people employed despite the fact that demand has slowed because of the credit crunch originating in the US Wall Street.

“It does not generally make sense for any mining company to maintain production and stockpile products as, financially, this is very difficult as they would be incurring all the costs for no immediate revenue,” said Bakang Seretse, Investec Fund Manager.
“For metals such as copper and nickel where there is an Exchange (a terminal market or buyer of last resort), it is easier for miners to continue production as they know they can always sell their product to the Exchange if there are no consumers willing to buy it,” he added.

His comments follow enquiries that there is a feeling that commodity prices, including copper, nickel and diamonds could rise before the end of the year owing to the fact that mining houses are cutting production, which could drive up demand as there is a short fall in the market.

“For producers of bulks (such as iron ore or coal) and diamonds, if demand collapses then producers have to cut production as producing and financing stockpiles is very expensive.

Whilst production cuts can certainly stop prices falling, it does generally need demand to be growing for prices to move significantly higher,” noted the Fund Manager.

There was hope for mining companies like BCL, as copper prices rallied by around 25% this year supported by Chinese buying and a number of cut-backs/disruptions to supply.

Seretse explained that at prices close to $4000/t most copper miners are now profitable meaning they are continuing to produce, especially as they can deliver any surplus to Exchange warehouses.

“Planned cuts in the copper industry have been less than many other metals due to the fact that the Chinese have purchased maybe up to 300,000 tonnes for their strategic stockpile, but also because there have been a number of mines underperforming as a result of equipment failures, declining ore grades and poor mine planning”, he revealed.

Other mining outfits like Debswana and Tati Nickel have cut production.

“If we see a more broad based recovery in demand later this year then prices could move higher as the market would be relatively tight but in the absence of better demand prices are likely to fall back towards $3000/t as supply will not be cut at these current levels,” he added.

BCL, which said last year it had cash reserves of P3 billion, made during the boom, is one of the many miners under pressure because of a fall in copper/nickel prices.

Seretse said prices for nickel remain under pressure but appear to have found support as at current prices a lot of producers are losing money and production cuts have been widespread and are continuing.

He said, however, whilst supply cuts have stopped prices falling it will take a stronger recovery in demand to get prices moving back up again.

Botswana’s largest revenue earner–diamonds received a massive disruption to the market due to the fact that many polishers, who buy rough diamonds from mining companies, have financial problems due to lack of credit and thus have been unable to purchase diamonds from miners which have led to a collapse in rough diamond prices of up to 50% or more.

At the same time finished diamond prices are only down by around 15% or so though sales volumes have fallen by more.

Debswana’s case is even complicated by the De Beers and the European Union’s anti-competition decision which bars the company from stockpiling its produce. De Beers is 50/50 shareholder with the Botswana government in Debswana Diamond Mining Company.

“According to the agreement reached between the two parties De Beers can not mine and stockpile. If it mines it has to sell all the produce,” an insider said, adding anything to the contrary would be viewed as some form of price fixing.


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