A Silver Lining for Metal Traders

Q: How has the COVID-19 outbreak impacted traders in Mexico?

A: It depends on each trader. METCO in Mexico has not been strongly affected. During the time that authorities asked miners to temporarily shut down operations, Mexican operators only ramped down activities but did not completely shut down. Transnational mining companies, most of them Canadian, did suspend operations, as a virus outbreak would have sent stock prices to the ground. Overall production was not dented significantly because the most of the Metco’s purchase are from Mexican producers. For other traders which their customers are the transnational companies there was strong impact because they stop all the operations.

Mexico produced roughly the same amount of metals during this time in 2020 as in the same period last year. The problem was on the purchasing side of the value chain. As the industry was paralyzed, some producers were not able to sell their cathodes. No one was willing to buy. These producers have been forced to look for other markets. This applies especially to producers of industrial metals. Precious metals producers have guaranteed buyers

Q: Were there any supply chain disruptions that made transportation of concentrates harder?

A: There are very few refineries in Mexico and those are owned by major companies like Peñoles and Grupo México, which use them to process their own concentrates. Most of the metals produced in Mexico are not refined here. But transportation to the refineries has not been impacted in a significant way. Land transport was not disrupted. Sea transport was affected somewhat. There are two types of sea transport, bulk and container carriers. The latter was affected because the pandemic hit China before it did the rest of the world. Therefore, China did not return containers for loading material, creating a container shortage. Another difficulty has to do with the routes that ships follow. They start in South America, stop in Mexico and go on to Asia. Ports in Peru and Chile were shut down, disrupting the whole chain. But it was mostly a matter of the process becoming slower, not totally halted.

Q: What is your outlook for gold, silver and copper prices?

A: The ongoing trade war between China and the US and the pandemic have a silver lining for precious metal traders. Whenever there is instability, precious metals become a haven. It is likely that gold will climb 10 or 15 percent in the coming months. It should scrape the US$2,000/oz mark before the year is over. Silver trails gold, so it is also reasonable to expect a silver price of US$1 to US$4/oz higher than it is today. The thing with silver is that it is mostly an industrial metal. An industrial slump like we are experiencing pushes its price down. Nevertheless, silver’s precious metal facet will buoy it up.

To understand base metals, one has to look at the metal’s price and also at the price for processing and refining. You need to distinguish between concentrate producers and metal producers. Mexico generally produces concentrates, and the concentrate market often behaves differently from the metal market. Refined copper, for example, has fluctuated a great deal recently. But refineries and processors have not varied their rates. Thus, producers find certain stability in the market. The copper market will get much tighter toward the end of 2020. Anyone who has copper to sell in the coming months will make a profit.

Q: What are the benefits Metco provides to a mining company?

A: Some people might think that traders are unnecessary middlemen, and that companies should sell directly to Asian or European refiners. But small and medium miners have no access to hedge lines. By working with Metco, they can fix prices in advance. Miners can obtain better prices if they work with us. Traders add up the production of several producers and negotiate with buyers on more favorable terms. Metco does not produce concentrate, but it has over 600,000 tons of concentrate on its books. We let small miners access prices that only large miners would be able to access.

Our logistics services are also a boon for miners. We help operators focus on producing and we take care of the logistics. We have operations in Manzanillo and in Altamira, so we can service Asia and Europe. A major advantage is that traders pay miners when the material is handed over here in Mexico. Miners do not have to worry about collecting payments. Perhaps a few large companies are fine with being paid in six months, but most smaller companies need the cash flow.

Q: What policy changes could make Mexico more competitive as an FDI destination?

A: Mexico has a serious problem with VAT refunds. That has been a major hurdle for our expansion here. A major company that has US$100 million VAT waiting to be refunded will not go bankrupt. A smaller company like Metco cannot afford to have large VAT refunds pending. In fact, even big trading companies are moving away from Mexico because of VAT refunds. VAT is 16 percent, the gain in this business for a trader it’s at the most 0.3 percent because remember we make money on the volumes. So, not returning VAT in a timely manner is undesirable for traders. This has become a barrier for attracting FDI. It is a long-standing problem in Mexico that goes beyond the present government.