Skittish markets hamper metals prices

Scotiabank's Commodity Price Index, after losing significant ground in late 2012, started 2013 on a stronger note, climbing 3.8 percent in January before slipping 0.9 percent a month later, Scotiabank Vice President, Economics Patricia M. Mohr told a capacity crowd at 2013 Nunavut Mining Symposium in April.

The annual gathering, held April 8-11 in Iqaluit, NU, the northern territory's capital, attracted 500 delegates, matching the record attendance reported for the symposium in 2012.

Mohr, a commodity market specialist at the Toronto-based financial institution, developed the Scotiabank Commodity Price Index, which is the first index designed to measure price trends for Canadian commodities in export.

In 2012, Scotiabank was ranked as the No.1 lead arranger (by deal count) in the Canadian and North American mining sectors; and the most international of the Canadian banks, with offices in Beijing, Shanghai, Chongqing and Hong Kong, operations across Asia Pacific (including India, Malaysia and Thailand), throughout Latin America (including Mexico, Chile, Peru, Brazil and Colombia), London and New York.

Giving an overview of the outlook for metal prices, currencies and global growth in 2013-14 and beyond, Mohr told the Nunavut gathering that commodity prices started 2013 on a positive note but the markets remain skittish because of lingering uncertainty in the U.S. and European economies and mixed signals from China.

"The global mining industry appears to be entering a period of more cautious and disciplined capital spending to boost returns for shareholders. Some new mine development has been deferred. This reflects the significant operating and capital cost escalation of the past three years and a still uncertain global economic environment - with major companies having difficulty dealing with global volatility - the start-stop nature of world economic growth since 2008 - and over-paying for large acquisitions," she said.

Commodity prices are expected to receive a modest lift this year from the re-stocking of raw materials, after buyers worldwide lost confidence and liquidated inventories or deferred orders in 2012, though prices for some metals, such as copper and nickel, will ease, she said.

In 2014, world growth should strengthen to average 3.8 percent, with GDP in the consumer-driven U.S. economy gaining 2.7 percent, while China's GDP is expected to grow about 8.3 percent.

This is moderately supportive of stronger commodity prices, said Mohr.

Noting a seismic shift in global growth has occurred from the G7 industrialized countries to emerging markets (especially in Asia), she said the share of investment spending in China's GDP, at 48.7 percent, is much higher than in the United States (12.3 percent), reflecting China's ongoing industrialization, urbanization and technological upgrading. This feature has tremendously boosted global demand for base metals, iron ore and steel over the past decade, she said.

"Riskier assets such as commodities and equities were buoyed by the 2012:Q4 pick-up in China's economy - with (gross domestic product) accelerating to 7.9 percent from 7.4 percent in Q3, accompanied by raw material restocking; a partial resolution of the U.S. 'fiscal cliff' (extension of the Bush-era tax cuts, excepting the payroll tax reduction, and stepped-up taxes on high-income earners); and expectations of some pick-up in the U.S. economy by (the second half of 2013)," Mohr said.

China is expected to continue pursuing the economic initiatives in its 12th Five-Year Plan, unveiled in March 2011, though the country has new "once-in-a-decade" leadership (elected in November) that is expected to seek more market-related solutions (less central planning), be more 'populist' and emphasize government over party interests.

China's State Council, concerned over escalating residential property prices, announced a five-point plan to contain prices. The plan calls for increasing land supply and speeding up home construction, including 6.3 million units of affordable, 'socially assisted' housing starts for 2013. Mohr said residential construction has an important impact on demand for steel rebar and metals.

China is no longer pursuing "economic growth at any cost," which reflects a subtle shift toward a slower, more market-determined advance, she said.

Mohr also said sales of oil, natural gas and motor vehicles are potential bright spots in the economies of both China and the United States during the next two years. But lagging jobs growth in the United States is slowing the economic recovery. The economist said U.S. payrolls advanced gained 1.91 million jobs during the year ended March 31, up slightly from the previous 12-month period.

Gold outlook

Among individual commodities, gold prices languished in early 2013 due to a shift of investor interest from gold to equities in anticipation of a moderate pick-up in the U.S. economy in the second half of 2013; the unlikelihood that the Federal Reserve will need to apply even more quantitative easing to kick-start the U.S. economy; a tax by India on gold imports; and the failure of Basel III to include gold in the liquidity coverage ratio for banks. (Basel III, or the Third Basel Accord, is a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk.)

While the Fed will maintain its 'asset purchase' program for some time, the mere discussion of when it will be withdrawn has unnerved the gold market, Mohr observed.

Scotiabank's price forecast is for gold to average US$1,600-US$1,650 per ounce in 2013 and US$1,600/oz in 2014.

Copper horizon

Global supply and demand conditions were in deficit in 2011 and largely flat in 2012 for copper, but are gradually shifting into modest surplus, according to Mohr.

"Copper prices are likely to ease alongside brownfield mine expansion," she predicted, noting that global consumption should pick up again in 2014 and 2015 (+5 percent per annum). However, world mine production will finally increase more substantially by the second half of 2013 and in 2014 (+8 percent), pushing down copper prices.

Scotiabank's price outlook is for copper to average US$3.54 per pound in 2013 and US$3.20/lb in 2014.

Copper prices are likely to ease below the US$3/lb mark by 2015, and rebound later in the decade, to US$3.50/lb, given high capital costs for new mine development," Mohr observed.

Zinc outlook

Describing zinc as the next big base metal play, Mohr said demand for the metal will be boosted mid-decade by a recovery in G7 construction activity, and zinc prices could climb as high as US$1.50 in 2016-17.

Global supply and demand conditions for refined zinc shifted into a surprising deficit in 2012, as Chinese producers temporarily shut down smelters in view of low treatment charges on domestic and imported concentrates, poor profitability and tight credit from Chinese banks.

China's smelters reduced output by an unprecedented 5.4 percent to 4.8 million metric tons in 2012, shifting the global zinc concentrate market into a moderate surplus, Mohr said.

On a more positive note, the supply and demand balance for both smelted/refined metal and concentrates will likely be in deficit by mid-decade due to significant mine depletion and inadequate zinc mine development, she observed.

"In the second half of the decade, zinc demand will be boosted by a recovery in G7 construction activity. Residential construction was exceptionally weak in the United States, following the 2008 'Great Recession', but is starting a multiple-year recovery," Mohr said.

Scotiabank's price outlook is for zinc to average US96 cents/lb in 2013 and US$1.10/lb in 2014.

Competitive iron

Iron ore benchmark prices will face more competitive market conditions as producers are challenged to compete with Western Australian iron ore with cash costs of only US$40-60 per metric ton and ocean shipping costs of US$7.60 to Beilun, China, said Mohr, noting that higher-cost Chinese mines will close, making room for capacity expansion in Australia, Brazil, West Africa and Canada, including the new world-class iron ore region that is emerging in the Nunavut/Labrador Trough.

The quarterly contract price for Pilbara Blend/Mt. Newman fines (FOB loading port in Western Australia) - the key international benchmark - should settle at about US215 cents/dmtu for the first quarter of fiscal 2013, Mohr said. Prices remain quite profitable for Rio Tinto and BHP Billiton in the Pilbara region, yielding a 67 percent margin over cash costs at the port.

However, the pace of China's steel production growth will likely slow in 2014-16, cutting the growth rate in world iron ore demand to 3.7 percent per annum, she predicted.

At the same time, large new and very low-cost supplies will be developed in Western Australia, with world supplies increasing by 8.4 percent per annum. The net result, market conditions will shift into balance by 2014-15, with a risk of surplus in 2016, she said.

In view of expected lower prices mid-decade and given the correction in China's iron ore imports last summer, companies are now examining project development more critically, with some mines deferred and other operations reconfigured to cut costs, she observed.

Baffinland Iron Mines Ltd., for example, is paring the size of its proposed C$4 billion Mary River iron ore project, which government regulators had approved for production in December.

Under the current project certificate, Baffinland would produce 18 million tonnes of iron annually and ship the ore year-round, but the company, owned 50-50 by Luxembourg-based steelmaker Arcelormittal and Iron Ore Holdings Corp. of Australia, now wants to produce 3.5 million metric tons annually to be shipped during the Arctic's three-month summer-fall open water season.

Baffinland is currently preparing an addendum to the project's final environmental impact statement, expected by the end of June.

The company said the new proposal will shorten the project's development timetable and generate revenue to help pay for the larger mine project.

Scotiabank's price outlook is for iron ore to average US188 cents per dry metric ton unit FOB loading port in 2013, US180 cents/dmtu in 2014, and US145 cents/dmtu in 2016.

Soft uranium

Spot uranium prices remain at low ebb in early 2013 - at US$42.25/lb - well below the US$66/lb average just prior to the Fukushima-Daiichi incident in Japan.

Mohr said global supply and demand conditions for uranium were in slight surplus in 2012, with U3O8 demand at about 184 million lbs just under total supply of 191 million lbs (about 151-152 million lbs of mine production plus secondary supplies of 39 million lbs). U.S. Department of Energy sales at roughly 10 million lbs per annum add to secondary supplies. The DOE had inventory of 111 million lbs equivalent in 2012 and will likely continue to sell off stock to pay for environmental cleanups.

However, she said a number of developments, including an aggressive push to build and operate nuclear reactors in Japan, Kazakstan and China point to a medium-term price recovery. "And most importantly, the end of the U.S.-Russia HEU Agreement in late 2013 (reducing supplies in the West by 24 million lbs U3O8 equivalent)," will affect uranium prices, Mohr added.

Scotiabank's spot price forecast is for uranium to average US$44/lb in 2013, US$50/lb in 2014, and US$60-65/lb in 2016.