Mining Markets


Scotia’s Mohr sees a ‘middling’ year ahead

While 2011 was a “spectacular year” for base metals and featured a big rally in gold to an all-time nominal high over US$1,920 per oz., 2012, in contrast, has seen commodity prices sink.

While 2011 was a “spectacular year” for base metals and featured a big rally in gold to an all-time nominal high over US$1,920 per oz., 2012, in contrast, has seen commodity prices sink.

According to Scotiabank’s Metal and Mineral Index, at the end of October, metal prices had dropped 13.5% year-over-year.

So what does 2013 hold for metal prices and mining investors?

Patricia Mohr, vice-president of economics and commodity market specialist with Scotiabank, suggests that next year will be better than 2012, while falling well short of the rally of 2011.

“I think it’s going to be kind of a middling year, unfortunately,” she says. “Next year, investors will have to be selective about their commodity market holdings.”

Demand from China, which has driven commodities prices higher over the past decade, has slowed over the year after several years of torrid growth, Mohr says.

“Our GDP forecast is 8% for China in 2013, and this year it will average around 7.7%. That is a fairly substantial slowdown after a period of about five years, when China’s growth was almost 10% per annum.”

In 2011, China’s GDP grew by 9.3%.

Mohr expects improving economic conditions globally next year, particularly towards the end of 2013.

For gold, that means a positive, but tepid forecast.

“Gold, of course, feeds on economic difficulty and financial market difficulty, so it seems to need a constant round of quantitative easing from central banks around the world — and recently, that has occurred,” Mohr says, pointing to moves by the bank of Japan and the U.S. Federal Reserve in September. The eurozone is also likely to see a program in support of buying the bonds of weaker countries on the secondary market.

“Accommodative monetary policy will probably continue across the G7 for a while yet, and that will be positive for gold,” Mohr says.

“But I don’t see [gold] skyrocketing. We actually think the U.S. economy and the global economy may be a little stronger in the second half of next year than in the first half, and that would argue for only limited further using of monetary policy.”

For 2013, Mohr forecasts an average price of US$1,750 per oz. gold, up from US$1,675 per oz. this year, but she says the metal could trade in a wide range around that average.

Mohr also notes that a development related to Basel III — new international standards of bank capitalization in response to the financial crisis — could see gold reclassified as a Tier 1 asset, which could give gold a lift. (It’s currently classified as a higher-risk Tier 3 asset.) A decision by the Financial Stability Board overseeing the Basel III reforms is expected in the first quarter of 2013.


While contrarians have waited patiently for a rally in uranium, they should not expect a strong recovery in 2013, Mohr argues.
Since the early 2011 nuclear disaster at the Fukushima Daiichi nuclear plant in Japan, the future of nuclear energy has been in doubt. Japan has since announced that it will phase out nuclear power by 2040, and other countries are also moving away from nuclear energy.

“I think Japan’s decision to gradually phase out nuclear energy has taken a toll on the market,” Mohr says. “Because of what happened at Fukushima Daiichi, it’s really kind of slowed demand for uranium, and the level of uncovered utility demand around the world is not high, so they don’t need to buy right at the moment.”

In late November, the spot price of uranium oxide was at US$41.25 per lb., which Mohr notes is “way down” from December 2011, when it fetched US$52.25 per lb.

It will take a long time before Japan can phase out nuclear energy, and China is going to be a big growth market, Mohr says. However, China has a “go-slow” policy regarding new nuclear plants, and Mohr’s uranium forecast for 2013 only allows for US$46 per lb. uranium oxide.

A U.S.-Russian agreement that allows for the recycling of highly enriched uranium from Russian nuclear warheads into lower-enriched uranium that can be used in commercial nuclear reactors expires at the end of next year. That should put some upward pressure on uranium prices, Mohr says.

“That program had involved the import of about 24 million lbs. uranium concentrates into Western markets, and mostly into the U.S.,” she says. “Western markets are going to be losing that 24 million lbs., so I do think that as we move through next year we should see some recovery in prices, but to still modest levels. I remain hopeful that we will move back up to the US$60 mark in the second half of the decade, but it may take a while for this to happen.”

Base metals

The base metals have all lost some ground in the past year, including copper, which is at historically high levels.

Mohr expects copper to continue being the best-performing of the four key base metals: aluminum, nickel, zinc and copper.

She notes that copper has dropped from its “enormous heights” in February 2011, when it reached US$4.60 a lb., but that at the mid-November price of US$3.49 per lb., copper producers are still enjoying lucrative profit margins of about 43% over average, break-even costs.

Mohr, who’s forecasting US$3.58 per lb. copper in 2013, says that technical problems and lower-than-expected grades at major copper mines have kept supply and demand in balance this 2012.

“One of the reasons why copper’s been so high in recent years has been the fact that in the past five years, new copper mine production and refined metals supplies have only increased something like 1.7% per annum in the face of rapid growth in China and in the emerging world,” she says.

Mohr anticipates the market will see an increase in copper mine supply next year (up 7.5% from 3.9% growth in 2012). But at the same time, global demand is expected to pick up by 5.5%. There’s also a risk that some of the new planned production — for example, new mines in the Democratic Republic of the Congo — will see delays.

Mohr says new mine supply coming on stream over the next year could keep prices for copper, nickel and aluminum on a “somewhat lower ebb.”

By the second half of the decade, however, Mohr sees base metal supplies tightening again. Healthy demand, capital and operating-cost escalation throughout the industry and recent mine deferrals are likely to keep nickel and zinc prices moving higher and copper at relatively lofty levels.

For 2013, Mohr sees nickel averaging US$8 per lb, little changed from US$8.10 in 2012, but down from US$10.38 per lb. in 2011.

Aluminum, which has not been performing well this year despite demand growth in the double digits from China, should strengthen to US$1.02 per lb. next year, up from US91¢ per lb. this year. Mohr notes that China is largely self-sufficient in aluminum and hasn’t become a consistent net importer of the metal.

As for zinc, smelters in China have cut back production because the treatment charges on imported concentrate are at unprofitable levels. That has led to a surplus in zinc concentrate on the market. However, with several mines slated to close mid-decade, the supply-demand balance could tighten markedly, with zinc potentially fetching US$1.50 per lb. by 2016, Mohr says.

In 2013, Scotiabank is forecasting zinc at US$1.01 per lb., up from the 2012 average price of US88¢.

A turnaround under way in China indicated by a rebound in industrial activity growth, which has slowed since 2011, bodes well for base metals, as well as iron ore and coking coal.

“Some of the weakness in iron ore prices — for example, in late August and in coking coal in the current quarter — some of that will be alleviated, and in fact, i
ron ore prices on the spot market have already rallied, though not up to anywhere near where they were a year ago,” Mohr says.

Spot iron ore prices had climbed to US$122 per tonne (for 62% iron) in early November, up from a low of US$90 per tonne in August.

While commodity prices are likely to stay relatively flat in 2013, that doesn’t mean the supercycle is over, Mohr says.

“I wouldn’t say that the commodity market bull run is at an end,” she says. “I just think we’ll be in a period over the next twelve months of absorbing some new mine supply, and I would look for stronger prices.”

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