TORONTO (miningweekly.com) – The mining industry will need to invest more than $150-billion to meet the medium- to long-term demand for commodities, with the need for investment in zinc, lead and even copper becoming “desperate” in the next few years, a presentation by commercial intelligence firm Wood Mackenzie (Woodmac) has suggested.

In a presentation prepared for the London Metal Exchange (LME) Week, in London, Woodmac vice-chairperson of metals and mining research Julian Kettle noted that across base metals, iron-ore and steel, Chinese consumption growth rates were set to fall dramatically in the next five years, compared with the previous half decade.

“However, we caution against this being interpreted as a bleak outlook – Chinese consumption hasn't hit a great wall. The scale effect, the sheer volume, still translates into significant incremental demand and good growth in tonnage terms. China will account for 58% to 69% of global total demand growth for base metals over the next decade,” he stated.

Kettle noted that there was, however, little appetite to invest, with prices cutting into the cost curve, low free cash flow, surpluses building, difficulty in financing and shareholders demanding dividends.

Although producers had responded to sustained lower prices since 2011 with some production curtailment, Woodmac’s analysis revealed that, across base metals, further production cuts were needed to ensure output was economic at current prices.

"In aluminium, we have the all-in price showing around 60% of the Chinese smelters are lossmaking at current price levels. But, in China, State support and the need to generate value-added tax receipts and power cross-subsidies will mean cutbacks will be a long time coming,” he said.

For copper, prices were hovering around the ninetieth percentile price plus sustaining capital expenditures – a measure Woodmac used to assess where production sat on the cost curve. “We're expecting a further 400 000 t to 500 000 t of cuts to offset the ramp-up of projects and to prevent surpluses building significantly. If more curtailments are not forthcoming, prices will test marginal (ninetieth percentile) costs of $2/lb,” he cautioned.

In nickel, Woodmac advised that 55% of the industry was lossmaking on a cash basis at current price levels, but there appeared to be little appetite to cut, with just 30 000 t of production cutbacks so far. Kettle said the market was focussing on the slow pace of Indonesian nickel pig iron development and nickel stock drawdown over the next thee to four years, rather than high above-ground stocks unavailable to the market.

In zinc, prices had held up much better, with only a very low percentage, around 10% to 15% of zinc miners, losing money on a cash basis at current prices. “Prices would have to be much lower to precipitate more cuts, yet the market is relatively balanced and trending to deficits until 2019, so one questions the need for cuts from a fundamental perspective,” Kettle said.

However, Woodmac noted that, for those who bucked the trend, there was an upside.

"As we've witnessed in our cyclical industry, we believe the winners will be those producers who invest counter-cyclically. The industry needs to sow the seeds for its future – without investment a critical shortage will follow," Kettle warned.