Commodities - Consideration of the cost curve again ::Macquarie Research,

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Commodities Comment
Consideration of the cost curve again
Feature article
 We assess current commodity prices against the cost of the marginal
producer. After the recent sell-off, more metals prices are now impacting the
curve, but in most cases it remains Chinese supply under pressure.
Latest news
 After a torrid last week, base metals suddenly surged on Tuesday as
expectations of a coordinated effort to sort out (or at least patch over) Europe
fuelled both risk-on and short covering. Lead and tin both jumped over 7%,
while copper jumped 4.5% to back above $7,500/t.
 Precious metals also gained, with gold up 3.8% as the rush to liquidate
positions reversed. With this, gold is now trading almost $90/oz above
platinum, and we would reiterate that the fundamentals for the latter look
much better, given the lack of supply growth and mine destocking this year.
The silver yo-yo was on an upswing today, up 19% to $33.5/oz.
 Workers at Teck's Highland Valley copper mine 280km north of Vancouver in
British Columbia, Canada, have voted to strike unless the company accedes
to their contract demands, including a significant increase in wages.
Negotiations between management and the union are set to resume on 28
September and the current labour contract is due to expire on 30
September. Highland Valley is the company's largest copper mine, producing
99,000t of copper-in-concentrate in 2010, equal to 0.5% of world output. The
strike vote comes only days after Teck announced a C$475m investment to
raise output and extend the life of the mine and is indicative of increasingly
fractious industrial relations in the mining industry, which raises the risk of
further disruptions to supply. In the case of copper, of course, such
disruptions have been a major contributory factor to the deficits seen in the
market in six of the last eight years.
 The latest data release from the American Iron and Steel Institute (AISI)
shows signs of a slight pullback in crude steel output last week. The body
estimates output at 87.3mtpa, down 1.8% WoW and equivalent to a utilisation
rate of 75.7%. However, this remains close to three-year highs, and the YTD
average of 86.2mtpa is up 6.6% YoY.
 ArcelorMittal has confirmed the commencement of iron ore output at its Mt
Nimba operation in Liberia, making it one of the very few West African iron ore
projects to have broken ground as yet. The project included reconstruction of
the necessary infrastructure to support the operation, including the 240km
railway and redevelopment of Buchannan port. The area had previously been
mined by Liberian state-owned miners until the 1980s. The company expects
to ship 4mt in 2012, in line with our current modelling.
 India’s JSW Steel has been forced to scale down production at its Vijayanagar
plant to just 30% of capacity due to an “abrupt disruption” to iron ore supply.
The catalyst was an order by the Supreme Court over the weekend that
material from state-owned miner NMDC must be sold via e-auction,
regardless of long-term contracts. Such a move makes it difficult for any
steelmaker to run furnaces practically given the lack of certainty in ore supply.
Macquarie hosted a call with senior JSW Steel management on Tuesday; for
replay details please contact your Macquarie sales representative.