Scotiabank’s Mohr talks copper

Last month, Scotiabank’s vice-president of economics and commodity market specialist Patricia Mohr received the 2012 Metal Bulletin Apex Award for the best gold and overall precious metals price forecasts. Mohr received top honours for her gold forecast, which she estimated with 99.63% accuracy. Mohr has also become well-known for introducing the Scotiabank Commodity Price Index in 1987. The index is U.S.-dollar based, and shows key Canadian commodity prices in export markets. Mohr recently spoke with The Northern Miner about her outlook for copper.

The Northern Miner: Can you speak generally about the state of the copper market today?

Mohr: This has been a part of the market that has performed extra well for mining companies around the world for a number of years now, and I think the price is going to hold up at lucrative levels. We’re averaging a cost of US$3.54 per lb. It’s weakened a little in recent weeks, and I think the developments in Cyprus and concerns again about eurozone growth and financial markets have really dampened prices lately. In late March, the London Metal Exchange cash price for copper was US$3.24 per lb., which is still quite profitable, and gives you a 39% profit margin over full break-even costs, including depreciation, so I don’t think anyone can complain about those numbers.

TNM: What’s going on in China?

Mohr: Recent industrial production numbers in China, although they remain favourable, have weakened a little compared to late last year. For the January to February 2013 period, industrial activity was up 9.9% year-over-year but it was more than 10% late last year, so it kind of slowed as we moved into this year. Of course, their economy revved up again in the fourth quarter — there was a fair amount of restocking of iron ore and steam coal. Their imports of steam coal (for electricity generation) were at a record high in the fourth quarter. I don’t see a lot of information on steam coal, but China’s imports were high in the fourth quarter.

TNM: What about copper supply and demand?

Mohr: We’re kind of on the cusp of a fairly substantial increase in brownfield copper-mine expansion. We’ve been waiting for this for a number of years now and it hasn’t happened, but I think copper-mine production is going to rise in the second half of this year and going into next year, and for that reason I have copper prices moving down to US$3.20 per lb. in 2014, and possibly a little lower in the several years after 2014. I think that we have probably seen a peak in copper prices, although you never know.

TNM: What about global gross domestic product growth?

Mohr: We assume that global economic conditions are somewhat better next year, with world GDP growth up 3.8% in 2014, compared with 3.2% in 2013. The 3.2% is only marginally higher than in 2012, when it was roughly 3.1%. So we have economic conditions in the slow lane in the first half, but improving as we move through the year. I hope that’s the way it’s going to be. Things look a little better in the U.S. They’ve had robust motor-vehicle production and sales, with the production coming back up to pre-recession levels. Some of this is because of variable vehicle stock in the U.S., so you’re getting replacement demand for vehicles. The [U.S.] housing sector has also firmed up, and we expect that it will firm up further through 2013, 2014 and 2015. And they use a fair bit of zinc in residential homes, some aluminum and a lot of copper, and the same could be said for autos, so things are picking up a little in the U.S. — not gangbusters, of course, but better.

TNM: How much copper is expected to come on stream in the next few years?

Mohr: There’s a fair amount of skepticism in the copper industry about just how much copper is going to come on stream, but I do think that there are many brownfield expansions, which we are going to see, and global mine output was up about 4% for refined copper in 2012. There was a measurable increase in Chile, and also in Peru. In 2014 we expect global mine production to be up 8% for copper. There will be some greenfield copper-mine developments: Mount Milligan in Canada, a small operation; Oyu Tolgoi in Mongolia, which has been built, so we’re just waiting to see production start there; and several projects in the Democratic Republic of the Congo. Between 2013 and 2016 there will be at least two greenfield projects in the DRC, one in Botswana, four in Peru, two in Chile and one in Panama . . . I think the [copper price] level will remain profitable particularly for this year, but probably we can expect some new mine capability, both brownfield and greenfield, for the next several years, and prices will ease back a little. But in the second half of the decade, I think things will ramp-up again on the price side.