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Sasha Naryshkine

Orders of importance

Sasha Naryshkine | Thu, 28 May 2009 09:42
[miningmx.com] -- WHENEVER I hear the wires quote what they suspect is important to the end users, I always find myself mumbling.

Some commodities get too much airtime, sometimes for historical reasons.

Locally, I can understand why gold is seen to be important. The city of Johannesburg was founded on gold, a freak of mother nature that saw such a rich deposit in one place. The same could be said about platinum and the Bushveld complex.

But which is the most important commodity of them all? What does mankind use most of? How much raw tonnage is produced and used every year - and what value is placed on it?

Let's start with oil. For the purposes of this exercise, let's base our calculations on current commodity prices.

Oil consumption for this year is expected to only equal 2004 levels, according to the US Energy Information Administration. The agency expects oil demand to run at 83.67 million barrels per day. The world consumes 30.5 billion barrels of oil per year.

Using current Nymex prices - $62 per barrel - that equates to a market of $1.908 trillion per annum.

With proven reserves somewhere around 1.371 trillion barrels at $62.5 a barrel, that amounts to about $85.73 trillion worth of oil left in the ground. That is about six years' worth of US gross domestic product.

The next most talked-about commodity is probably gold, because of its historic importance as a currency.

Around 76.8 million ounces of gold are mined per annum. At $950 per fine ounce that equals $72.96bn. Total gold mined is purported to be over 150 000 tonnes, worth $4.56 trillion at current levels.

Some 17 021 000 tons of copper were mined in 2007. At the current price of around $4 480 per tonne on the London Metals Exchange that equates to a dollar value of $76.2bn. So, marginally more value traded than gold, even though pure weight is grossly skewed to copper. And this was 2007 versus 2008.

With iron ore, the price is tricky, as is the grade - different grades are sold at different prices. A web search from various sources suggests that iron ore prices for the fines varied between $191 per tonne in March 2008 to $77 per tonne in December 2008. An average price based on the monthly price last year comes to $146 per tonne.

Total production is around 1 615 million tonnes per anumm. A tonne costs about $146; a million tonnes $146m. Multiplied by 1 615, that reaches $235bn per anumm. Iron ore is more important than copper and gold, much less important than oil.

Let's explore platinum. Well, this is small globally, but important in a South African context. This year the whole platinum supply is going to be about 6 million ounces. At $1 135 per fine ounce, that has a total worth of $6.81bn - very small compared to copper and gold, and a drop in the ocean when compared to the oil market.

Aluminium production for the whole of last year was 27 381 000 tonnes, according to the International Aluminium Institute, which accounts for measuring about 80% of the globe's production. Aluminium is the most abundant metallic element on earth. As per the last measured price on the LME, $1 404 per tonne multipled by the rolling production number, you reach around $38.5bn.

OK, so let's put these few commodities into context. The value of oil used per annum seems far and away the most important commodity to the globe.

Iron ore, which receives little airtime on the wires, is three times more important in dollar terms than both gold and copper. Does copper receive as much airtime as gold? The short answer is no.

It is also important to bear in mind that base metal prices have halved from their highs.

Apart from a flutter in the platinum price when the lights went out in the first quarter of 2008, it has risen steadily after a serious dent. The gold price as a fear gauge and anti-dollar measure has done the best out of all of commodities.

The ride in oil prices has been wild and if it goes back to $100 a barrel, you can see the economic impact on the globe as well as the producers.

I guess with the historical fixation on both oil and gold, we won't be hearing the quoted price per tonne of iron ore at the end of the news anytime soon.

The point I am trying to make is that some commodities receive more airtime than others, but in truth, energy should be what we talk about 20 times with every reference to gold or copper. Over time, because you cant use up gold, its importance relative to oil will increase.

But for the time being, oil is tops. Iron ore, copper and gold stand next to each other, with aluminium and then platinum at the back of the queue.

The exercise may be simplistic, but it was fun nevertheless.



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