PDAC: base metals and potash prices set to consolidate gains in 2011

The outlook for base metals prices looked equally bright to the next set of speakers at the opening technical session “Commodities and Market Outlook” of the Prospectors and Developers of Canada convention in Toronto.

After copper’s rapid price rise following the global recession, during which time copper greatly outperformed a basket of commodities, GFMS’s Mark Fellows said the question today is, “How long can this carry on?”

GFMS’s answer, he said, is that the copper-price outlook “remains positive but the upside remains constrained.”

Noting that copper prices correlate strongly with global growth in gross domestic product, Fellows anticipates that global GDP growth will slow somewhat this year to a still-healthy 2.8%.

However, he recounted how the copper price was supported in late 2010 as the copper market fell into deficit in mid-2010, generating a 300,000-tonne deficit for all of 2010. Fellows predicts that this deficit will shrink in the first half of 2011, but start growing again in the second half of the year, once again providing good price support.

Another optimistic factor, he said, has been the rather low level of copper substitution we’ve seen in the past year (for example, replacing copper with aluminum in high voltage cables).

Andy Roebuck from Teck Resources said the zinc story was all about the growth in zinc demand from Asia, and especially China. Some 12 million tonnes of zinc was consumed globally in 2010, and 43% of that happened in China.

Roebuck emphasized that the galvanizing rates in China per square unit of steel surface was only about 40-50% the rates achieved in Western countries, so that if Chinese auto manufacturers ever start exporting cars to the West, they will have to match the West’s galvanizing quality, which should increase zinc consumption.

Remarkably, China’s zinc mine and refined-zinc production are up 108% and 164%, respectively, since 2000, but these supplies are still not enough to satisfy the dragon’s hunger, and China today still needs to import zinc concentrates and zinc metal.

Roebuck pointed to a growing structural deficit between primary refined capacity and mine production globally. In some good news for zinc juniors, this is being expressed in falling treatment charges and a tightening market for zinc concentrates.

Stating bluntly that “steel demand is always the driver for iron ore prices,” analyst Phil Newman from CRU Strategies in London said with barely concealed excitement that 30 years of steadily falling iron ore prices in real terms had been reversed in the last 4-5 years.

China loomed especially large once again, as Newman expects that a mind-bending 95% of iron ore demand growth during the 2007-21 period will be attributable to China.

A vast amount of new, export-oriented iron ore mine supply is due to come onstream in the coming years from Australia and Brazil (countries such as Peru and Canada are pikers by comparison), and there will also be substantial contributions from domestic Chinese sources and Indian scrap.

Newman noted that some 57% of seaborne iron ore exports come from the Big Three – BHP Billiton, Vale and Rio Tinto – and that the iron ore businesses of these three generated a wallet-busting US$50 billion in combined earnings before interest and taxes in 2010.

Veteran nickel analyst Santo Ranieri from Toronto’s Paradigm Capital said that, after the last few wild years, the nickel market “should be fairly balanced” in 2011, as a robust 3.4% increase in total nickel demand will be met with substantial increases in mine production and refined nickel supply.

Paradigm is forecasting a nickel price of US$11 per lb. in 2011 and US$10 per lb. in 2012.

Ranieri pointed to several factors to keep an eye on in the nickel world: the continued failure of high-pressure acid leach (HPAL) nickel-laterite mines to live up to their production and cost projections; the delays of more than a year in the start-ups of several new conventional nickel mines globally; and the influence of new, low-nickel pig iron supplies in China as a low-end competitor with traditional, higher-quality swing producers.

Analyst Paul D’Amico from TD Securities in Toronto began his talk on potash by underscoring that potash fertilizer doesn’t need to be applied every single year with most crops, which complicates potash demand forecasts.

When it comes to potash, D’Amico said, “everything starts with crop prices, and every decision is made with crop prices in mind.”

Specifically, he fingered corn prices as being the best proxy for potash prices, owing to corn’s high nutrient intensity and the corn market’s large size and relatively high level of transparency.

The big four crops – corn, soybean, wheat and rice – all had price spikes in 2008 and have come off quite a bit in price since then and stabilized, but D’Amico describes crop and potash investors as still being “gun shy.”

With potash prices tracking crop prices, D’Amico sees potash as having entered a “normalized market low” thanks also to stable potash mine operating rates through to 2015. But he warns that the 2015-2020 period “could be a more challenging time” as new potash production comes on-stream, such as BHP Billiton’s (BHP-N) greenfield Jansen project in Saskatchewan.