Metals gurus predict prices for 2011

The opening technical session “Commodities and Market Outlook” of the Prospectors and Developers of Canada convention in Toronto gave a relatively upbeat outlook for precious metals, base metals and potash prices this year, especially considering the wild ride investors endured over the 2008-10 period.

• Mining analyst Michael Jansen from JP Morgan’s London office kicked things off by declaring that there is “still considerable head room in real terms” with respect to the gold price.

He said the opportunity cost of holding gold will continue to be low as long as the real yield on U.S. assets remains low, or around 1.2%. He commented that the opportunity-cost factor “matters more than the inflation-hedge argument” for gold, because the gold/inflation relation “has broken down.”

Equities, he said, “looked cheap compared to gold,” and he described how he’d seen the “wholesale crowd pull back from gold and go into equities.” As a result, he said, the gold exchange-traded funds (ETFs) sector “has topped out as we start to see liquidations.”

Other factors at play these days, he said, are: net gold purchases by central banks; mining companies’ hedge books essentially reaching zero; mine supply surging 3-4% in the coming years after having leveled off in previous years; miners’ cash costs rising slower than the gold price’s rise (globally cash costs averaged US$555.40 per oz. in 2010); and gold’s share of exploration spending having shrunk to 50% today from 90% around the turn of the millennium.

JP Morgan predicts gold will average US$1,465 per oz. this year, and has a target of US$1,500 per oz. by the end of the year.

• Mining analyst Jim Steel from HSBC’s New York office had a similar message about silver’s prospects, given that silver’s all-time high 30 years ago is actually US$125 per oz. in today’s terms once adjusted for inflation. (c.f. gold’s inflation-adjusted all-time high is US$2,300 per oz. in 2011 dollars).

Steel noted that silver’s recent price rally outperformed every other asset class, even though silver “looks expensive compared to gold” based on the gold-to-silver price ratio.

With respect to silver ETFs, he described them as being less prone to selloffs than one might expect, because the average silver ETF holder is male, is in his 50s or older, has a net worth exceeding US$1 million, and is holding the silver ETF as part of an inheritance for his children.

• Analyst Edel Tully from UBS’s London office listed five reasons to be optimistic that palladium prices would continue to be strong: rising gasoline-powered car demand in China (palladium is used in gasoline autocatalysts, whereas platinum is used in diesel autocatalysts popular in Europe); the catching up of Chinese emissions standards with the West’s more-demanding and more-palladium-consuming ones; price-inelastic demand with limited threat from electric cars on a 5-year view; constrained mine supply from Russia and South Africa; and diminishing available Russian stockpiles.

As for platinum, she described it as “playing catch up” to palladium, as investors had sold platinum to buy palladium.

She said South African mine supply “is challenged” owing to rand appreciation, 10+% wages rises, soaring electricity costs, threats of supply disruptions, and falling grades.

On the demand side, Tully cited that global vehicle sales had rebounded to pre-recession levels, and that America’s brief flirtation with low-platinum-consuming small cars had ended.

Overall for 2011, UBS is forecasting average palladium and platinum prices of US$800 and US$1,905 per oz., respectively, and rising next year to US$825 and US$1,950 per oz., respectively.

• Analyst Greg Barnes from TD Newcrest in Toronto marveled at the turnaround in uranium prices over the past six months. After languishing around US$40 per lb. uranium oxide for three years, prices soared to US$73 per lb. before settling to today’s US$60-per-lb. level.

This was caused, he said, by the “Chinese making a big move into the long-term market, which surprised people,” in order to fuel the country’s 23 new nuclear power plants either under construction or likely to be built in the not-too-distant future.

Barnes ticked off some of the other major factors affecting uranium prices: the U.S. Department of Energy selling off uranium stocks to pay for environmental cleanups; the end in 2013 of Russia’s nuclear-warhead-sourced, highly-enriched uranium sales program; global uranium mine production increases, especially from Kazakhstan, which has surpassed Canada as the number one producer; and large Indian uranium purchases to come, as it politically normalizes its nuclear industry.

Barnes reckons a US$70-per-lb. uranium oxide price is necessary for new uranium mines to be built. Accordingly, TD Newcrest is predicting uranium oxide prices in the US$70-80 per lb. range to 2016.

• After copper’s astonishingly rapid price rise following the global recession, during which timecopper 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 outlook for copper prices “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, despite GDP growth slowdown, 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 consumption 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’ll have to match the West’s galvanizing quality, which should increase zinc consumption.

Remarkably, China’s zinc mine production and refined-zinc output 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 glee 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 three iron amigos – BHP Billiton, Vale and Rio T
into – and that the iron ore businesses of these three last year generated a wallet-busting US$50 billion in combined earnings before interest and taxes.

• 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 the fact 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 four big-ticket 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” as a result of the anxiety endured during the spike.

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 anticipated 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 greenfield Jansen project in Saskatchewan.