Base metals

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Copper

Global context

• The upswing in global mine production during the second half of the year was not mirrored fully in refined copper output in 2004, since smelters had to replenish their stocks of concentrate, which had fallen to low levels. As a result of the small increase in output, coupled with the significant rise in consumption largely attributable to the United States and Asian countries, the deficit of refined copper on the international marketplace worsened in 2004. Stocks declined sharply and the inventories held on metal exchanges contracted throughout the year, tumbling to a year-end level nearly 85% below that for 2003 and the lowest level posted since the late 1980s.
  
  
• Supported by robust market fundamentals, the price of copper soared in 2004, with prices also being buoyed by investment fund interest in base metals. The average annual cash price on the London Metal Exchange (LME) shot up by about 60% compared to 2003, rising to US$1.30/lb, the highest level since 1995. The price of copper ended the year on a high note, at US$1.49/lb. Given the major deficit in the global marketplace and the low copper inventories, the price of this metal was very volatile during the year, reacting to news about the Chinese economy, potential production shutdowns and the performance of the US dollar.
  
  
• The concentrate supply constraints affecting smelters gradually eased up in 2004. After a difficult start to the year, treatment and refining charges rose substantially during the second part of the year. Furthermore, information available at year-end 2004 appears to show that the charges set out in annual contracts will double in 2005.

Situation in Québec

• The Horne smelter’s 2004 output was slightly higher than the level forecast at the start of the year (145,000 tonnes). The appreciable increase in revenues derived from processing fees may provide the impetus for stepped-up production at the Horne smelter in 2005.

• The Louvicourt mine, the main copper producing mine in Québec in 2004, will cease operating in summer 2005.
  
  
• In November, Campbell Resources became the sole shareholder of Corporation Copper Rand (CCR). It expects to begin commercial production at the Copper Rand 5000 copper and gold mine in the first quarter of 2005. The mine has been in a pre-production phase since November 2004.
  
  
• Campbell Resources continued exploration work at its Corner Bay copper deposit near Chibougamau, and a ramp is to be driven in 2005.

Outlook for 2005

• Although consumption of refined copper should stay firm in China, Western countries will cut back on their consumption, particularly the United States, leading to a drop in the global rate of expansion. The increase in mine production will have more of an impact on the supply of refined copper in 2005, since smelters have already moved to replenish their stocks of concentrate. As a result, the refined copper market should stabilize gradually during the year, bringing about a significant reduction in the deficit situation for the year as a whole. Copper prices will continue to benefit from fairly tight market conditions, in a context characterized by record low inventories on metal exchanges. Analysts believe that the average annual price of copper will remain high in 2005, but most of them foresee a slight decrease from the 2004 level.

Nickel

Global context

• In 2004, world consumption of primary nickel continued to be buoyed by the growth in stainless steel production, which accounts for nearly two-thirds of consumption, as well as by an upturn in other nickel uses. The rise in consumption was not as strong as forecast at the start of the year, because of the high nickel prices, which also affected supply. The high price resulted in:
  
  
  • Greater availability of recycled stainless steel;
  • Selling of stockpiles of nickel and stainless steel, particularly in China;
  • A substitution effect from the stepped-up production of classes of stainless steel that contain less nickel.

• With the tight market situation and low stocks on the LME, nickel prices remained true to their reputation of being highly volatile, in 2004. The price fluctuated between US$8.06/lb, posted on January 6, and US$4.78/lb, posted on May 18, ending the year at US$6.90/lb, compared to US$7.55/lb at year-end 2003. Although the price peaked early in the year, a number of analysts said that it was higher than warranted by the market fundamentals at that time, owing to speculative buying. Nickel prices fell sharply in the first few months of the year, before edging up again and sustaining their high overall level for the year. The average annual cash price for nickel on the London Metal Exchange (LME) rose from US$4.37/lb to US$6.27/lb, an increase of more than 40% and the highest level since 1988. Nickel prices were also buoyed by investment fund interest in base metals, which was stimulated by the weak US dollar.

Situation in Québec

• The Raglan mine, on the Ungava Peninsula, is the only nickel producer in Québec. In 2004, its output totalled 26,552 tonnes of nickel, up 5.7% over 2003. Research is continuing with the aim of boosting production by almost 40% within the next few years.

Outlook for 2005

• Global consumption of primary nickel should expand at a faster rate in 2005, particularly since China appears to have stopped selling off stockpiles. International stainless steel production is expected to continue its upward trend. Inco will begin production at its Voisey’s Bay nickel deposit in Labrador. Nickel consumption will likely be constrained again this year by tight supply conditions. The world market should therefore be close to equilibrium or show a small shortfall.
  
  
• The nickel market will continue to be buoyed by its relatively solid fundamentals. With low stocks on the LME, the average annual nickel price is likely to be high in 2005, although most analysts are predicting a slight drop from the 2004 level. Factors such as the recycled stainless steel supply and substitutions could always come into play and change the picture, as they did last year.
  
  
• In 2005, the Raglan mine expects to produce 20,700 tonnes of nickel, or 25% less than a year earlier, owing to a planned shutdown at the processing plant in order to make changes to the grinding circuit. In 2006, annual nickel production should decrease to 25 Kt.

Zinc

Global context

• Global production from zinc mines grew only slightly in 2004, and the Western world’s output actually declined, slowing the production of refined zinc. The Western market also had to cope with a sharp drop in China’s exports of refined zinc, as this country may have become a net importer. Consumption grew at a high rate, once again bolstered by Chinese demand, but also by the significant upturn in Western demand, particularly in the United States. For the first time since 1999, the global refined zinc market moved into a deficit position. Stocks on the LME nonetheless remained high owing to the influx of unreported stocks over the course of the year.
  
  
• The average annual cash price of zinc on the London Metal Exchange (LME) rose a little more than 25% from the 2003 level, to US 47.5¢/lb, the highest level since 2000. The price of zinc nonetheless increased at a slower rate than several other base metals, on account of the high zinc inventories. The price rose substantially at year-end, however, as a result of the improved market fundamentals, including a steady decline in stocks listed on the LME during the last quarter. The price ended the year at US 57.6¢/lb, its high point of the year. Zinc prices also benefited from investment fund interest in base metals.
  
  
• The concentrate supply problem that smelters faced persisted in 2004, and for the third consecutive year there was a drop in treatment charges set out in annual contracts. The year-end forecasts also point to a further decrease in these charges in 2005. Smelters were nonetheless able to take advantage of the high zinc prices in 2004, thanks to price participation escalator. This should also happen in 2005 since a new price increase is foreseen.

Situation in Québec

• Zinc shipments from mines rose nearly 2% in 2004 from about 253,000 tonnes to 257,000 tonnes. This small upturn is due mainly to the higher zinc output at the LaRonde mine.

• The CEZinc refinery in Salaberry-de-Valleyfield operated at full capacity in 2004, producing nearly 275,000 tonnes of zinc metal. The outlook for 2005 is equally promising, given the higher prices and the low supply situation forecast for the zinc market.
  
  
• The Bell-Allard mine, which accounted for 35% of the zinc produced in Québec in 2004, ceased operating in October of the same year. At the Bouchard-Hébert mine, which contributed 20% of the zinc produced in 2004, operations are slated to end in spring 2005.
  
  
• In July, Noranda decided to put off development of the Perseverance project located a few kilometres southwest of Matagami, because of the low zinc price (US$0.44/lb). No date was given for the resumption of operations, and the start-up of production is now deferred to at least 2007.

Outlook for 2005

• In 2005, global consumption of refined zinc should continue to increase, but at a more moderate rate than last year. Chinese demand is expected to remain high. However, since production is expected to expand slowly due to concentrates being in short supply, the world refined zinc market should continue to exhibit a deficit. In addition, Chinese exports may keep moving downward in 2005, and some analysts are even suggesting that China will be a net importer. The buoyancy of the market fundamentals for zinc should allow the average annual price to rise again in 2005, although more modestly than last year.