Major Projects Could Help Medium-Term Outlook for Latin America's Mining and Metals

---

Researched by Industrial Info Resources (Sugar Land, Texas)--A week is said to be a long time in politics, but at the beginning of the second week of October, a day was a long time in mining stocks and prices. Within 24 hours, the banking recovery packages promised by governments sprung the first bounce in stocks and metals prices, which had fallen to five-year lows by as much as 60% from their previous highs.

The good news for Latin American miners was that copper futures on the London Metal Exchange were up by 7.5% on October 14 with copper for delivery in three months up by 6.3% to $5,435 a ton, after trading at a 32-month low on the previous Friday. In terms of the outlook for the whole of the region's mining and metals sector, there was now hope that a flat or downward three to six months, followed by a shallow 12-month climb by some metals, which had been the best of the bad news around, could be overtaken by more positive events. The belief that projects in China, the Middle East and consumer appetites of the new middle classes could reinstate the pace of metals and resources demand now seemed a possibility rather than the last straw to hang on to.

The International Monetary Fund, in its World Economic Outlook, adjusted its Latin American gross-domestic-product growth forecast to 4.5% for 2008, down from 5.5% in 2007, and then down to 3.25% for 2009. Forecasts for individual countries went down in parallel with the UBS Investment Bank (New York, New York) forecasting Chile to go down to 3.2% in 2009 from 4% in 2008, and Argentina falling to 2.5% in 2009 from 4.4% this year.

Taking a step back six weeks to the end of August to try to get a perspective -- across the noise of the free-fall banking crisis -- on the medium term future, Industrial Info checked the "Manufacturers Alliance/MAPI Latin American Outlook: 2008-2009." This was concentrated on the region's three largest economies -- Brazil, Argentina and Mexico -- which carry more than 80% of the region's manufacturing output. MAPI raised its forecast for overall manufacturing output in 2008 to 4.9%, revising it from 3.8% at the end of 2007. A 10% growth in the automotive industry was forecast for 2008 followed by 7.6% in 2009. Machinery and equipment was forecast at 11% growth in 2008 and 9.7% in 2009. At that time, at the end of August, MAPI's outlook was "cautiously optimistic," although it said that growth levels would decelerate in real terms. Suppliers to the automotive, transport equipment and equipment and machinery industries, such as manufacturers of basic metals and fabricated metal products, were reported to be expanding output to keep up with rising demand. In the past six weeks, the banking crisis, the credit crunch, inflation and weakening U.S. demand have made "cautious optimism" rare.

At that point, MAPI had the growth in nonmetallic mineral products for the region rising to 4.4% in 2009 from 3.5% in 2008; basic metals falling to 2% in 2009 from 7.1% in 2008; fabricated metal products rising to 7.5% in 2009 from 6.8% in 2008; and machinery and equipment falling to 9.7% in 2009 from 11% in 2008.

Is the commodity market going to spiral into a vicious circle of falling demand, falling prices running with diminishing export prospects? Will a more virtuous circle with leaner production targets, scarcer resources of skills and equipment available for mining projects, and the control of project cost escalation form out of the turmoil? The latter, maybe. Has all the bad news already been discounted in prices and the only way is bumpily upward?

Pulling the mining sector through to brighter horizons will be some major projects currently in the construction or planning stage. Vale's (NYSE:RIO) (Rio de Janeiro, Brazil) $1.2 billion Vermelho nickel project in Brazil's Para state is set to start producing an annual 46,000 tons of metallic nickel and 2,800 tons of cobalt by the end of 2008. In Para, Vale is also constructing the $1.48 billion Onca Puma project, which will produce 57,000 tons of nickel per year. Vale is also constructing the $970 million Salobo project in Carajas to produce 200,000 tons per year of copper.

Xstrata (LSE:XTA) (Zug, Switzerland) is the principle in the Argentina-Chile El Pachon $1.5 billion project, which will have an ore processing capacity of 100,000 tons per day and an annual production of 300,000 tons per year of copper. Grupo Mexico (OTC:GMBXF) (Mexico City, Mexico) is planning a $1.4 billion copper-gold project in Baja California. Barrick Gold (NYSE:ABX) (Toronto, Ontario) is scheduling the $2.3 billion Pascua Lama to begin operation in 2010. BNamericas estimates that the top 10 mining projects in Latin America in the 2007-17 period will take a total investment of $15.3 billion. This, with other major projects planned in infrastructure and energy, should give a basis for a long-term bounce in the mining and metals sector.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.