Metal Prices Look Strong In 2010

The annual Prospectors and Developers Association of Canada convention and related events kicked off towards the end of the ninth trading week. The commodities and market outlook talks on the Sunday are always a great way to ease into the convention frenzy ahead.

• Analyst Andrew Keen of HSBC Securities in London described 2008 as “surprisingly bad” and 2009 as “surprisingly good” for metals prices and predicted that 2010 would see a 6.6% rise in metals demand. He argued that the best performing commodities would be contract iron ore, coking coal and platinum, and said he’s wary of lead and copper.

Keen pointed to US$4 billion in cash costs that had been taken out of the operations of the world’s biggest miners in the past couple of years, setting the stage for these companies to be “hit with a wall of cash” as metals prices continue to strengthen.

• Economist Martin Murenbeeld of DundeeWealth Economics sees gold prices continuing to perform well for the next five years as governments around the world continue to engage in reflation. He emphasized that the “single most important thing for gold is global liquidity.”

Noting that the 1980 peak in gold prices at US$850 per oz. would equal US$2,385 per oz. in today’s money, Murenbeeld predicted that gold will average US$1,172 per oz. this year, and end it at US$1,234 per oz. before heading higher in 2011 as investment demand becomes “the next big thing.”

• Phil Newman of CRU Strategies described how China “came to the rescue of the iron ore market in 2009,” predicting that 2010 iron ore prices will return to 2008 levels and even beyond.

• TD Newcrest analysts Greg Barnes and Paul D’Amico both struck notes of caution for nickel and potash prices, respectively.

Barnes described the potential for a “massive supply response” to higher nickel prices, as “there is a lot of nickel on the market, and lots waiting in the wings” as an astonishing 23% of world nickel supply was cut in 2009. On the positive side, nickel poked its head up above US$10 per lb. on March 4 and 5, though Barnes predicts “nickel prices will go sideways” this year as a 19,000-tonne nickel surplus develops.

D’Amico recalled that there had been no new substantial potash mines built in 30 years, and that the “supply looks very healthy ahead.” The biggest constraint to supply growth, he argued, was access to the large and specialized machines used in potash mining.

• Michael Schwartz of Teck Metals was less forthcoming in his copper-moly outlook, as Teck’s policy is to not make public commodity price predictions. But he marveled at how copper defied fundamental analysis last year, as prices rose strongly even in the face of one of the largest-ever copper surpluses. Copper even behaved as a hedge against the U.S. dollar, up until the recent Greek crisis. Schwartz characterized China’s flip from being a net moly exporter to net importer as the “biggest thing to happen to moly in twenty years.”

• Barclays Capital analyst Suki Cooper painted a rosy picture for platinum and palladium prices. She stated that “2010 is set to be an impressive year for both” as autocatalyst demand rebounds after a weak 2009, when jewellery and investment demand picked up much of the slack. “Despite higher prices, we don’t see a surge in mine supply,” Cooper said, predicting that platinum and palladium will outperform gold and silver, due to new demand created by platinum-palladium exchange-traded funds. Barclays predicts platinum and palladium will average US$1,690 and US$470 per oz., respectively, in 2010.

• Breakwater Resources’ Steve Hayes delivered an impassioned plea for investors to take a fresh look at “unloved” zinc and its beaten-down miners. Over the medium to long term, zinc mine production is set to decline, as big mines such as Brunswick in Canada and Century in Australia are slated to close. He characterized zinc mining as a “fractured industry” that stands in contrast to highly consolidated subsectors such as iron ore, where consolidation is directly linked to profitability. Zinc miners should also benefit from new smelters being built in Asia, which could turn zinc into a seller’s market.

• Cameco’s Ken Seitz said the uranium business is “digging out of a big hole from the 1980s and 90s where we skipped two demand cycles.”

He noted that the U.S. government is prepared to sell much of its 153-million-lb. uranium stockpile, but will only dispose of a maximum 10% per year. Seitz estimated that secondary uranium supply sources will fulfill 21% of demand in the next 10 years.