Scotiabank’s Marc Desormeaux on 2022 outlook

Marc Desormeaux leads Scotiabank Economics’ regional economic forecasting and commodity market coverage and is the creator of Scotiabank’s Provincial Outlook, the department’s quarterly forecast publication on Canada’s provincial economies. Prior to joining Scotiabank, Desormeaux worked in the forecasting division at the Conference Board of Canada. The Toronto-based economist recently spoke with The Northern Miner about his economic outlook for the year ahead and his price forecasts for precious metals, copper, iron ore, nickel and uranium.

TNM: What is your overall outlook for 2022?

Marc Desormeaux: The fundamental outlook is still pretty solid.  We expect the global economy to continue to recover in 2022 with the re-opening from the pandemic. Government stimulus is coming out around most of the world, and broadly speaking, this is good for commodity prices. And then over the longer term, we have to think about the green energy shift, which is certainly bullish for metals like copper and nickel and other battery metals. 

TNM: What are the key challenges?

MD: There are some potential headwinds: The Chinese growth outlook looks like it’s going to moderate. And there are some potential risks from this Covid variant Omicron that’s popped up in the last couple of weeks. But broadly speaking at this point, the outlook is pretty solid from a fundamentals point of view.

TNM: There is some anxiety about inflation.

MD: Inflation is certainly dominating the headlines. We look at data and it appears that what is driving most of the cost inflation we’ve seen are the global supply chain issues. We’re at the point in the economic recovery where demand is very strong. Consumers want to buy things and companies want to ramp up production, but they aren’t able to do it to the extent that they would like because with the global recovery, transportation networks are not responding quickly enough. And that’s a function of the fact that we were closed for a long period of time and now various parts of the world are re-opening at different speeds. So there’s this supply chain issue overhanging the global economy and it’s really contributing to price appreciation.

TNM: You have some stats on shipping rates and the Baltic Dry Exchange Index, which tracks iron ore and coal cargoes of 150,000 tonnes, and the stats underscore how high prices have gone over the last year. 

MD: The Baltic Dry Exchange Index reached 5,650 — the highest level attained since September 2008 — earlier this year in October. Since then, softer demand in China and weaker iron ore prices have contributed to the Index easing below 3,000 — still higher than most of the last decade.

TNM: Will the inflation we’re seeing now accelerate or moderate next year?

MD: We believe it will remain above the 2% target through next year in Canada and the U.S., but that we’ll see some easing of price pressures as we get further into 2022. Hopefully the spread of Covid can remain largely under control, supply chains will be able to respond, and there can be a pick-up in shipping and the availability of input and final products. But in the near-term, inflation looks like it will be pretty strong. And that’s something that impacts the global economy for metals like gold and silver, which are classically viewed as hedges against inflation.

TNM: How much do you expect China’s growth trajectory to moderate?

MD: We have Chinese growth continuing. We are projecting 8.2% real GDP growth in 2021 and our forecast calls for real GDP growth to moderate to 5.1% in 2022 and then accelerate to 5.3% in 2023. So a more moderate pace of growth. Given that China is the largest metals consumer in the world, that will have implications for commodity prices.

TNM: What are some of the factors driving a more moderate pace of growth in China next year?

MD: One relates to power grid restrictions in China that are intended to slow down emissions in the lead up to the Winter Olympics. That’s had an impact on industrial activity and on imports of various products. Another factor is the question of strength in China’s real estate sector. There have been a few reports recently of very high debt levels, and there are questions about whether the pace of building and home buying can continue. So we’ve assumed a more moderate pace of expansion in that component of GDP in China.

TNM: What is your GDP forecast for the United States?

MD: As of our December forecast, we had 5.6% growth in real GDP growth in 2021 and then a moderation down to 4.2% in 2022. So some more moderate growth, but still well above the trend rate as the recovery from Covid-19 recovery continues.

TNM: What is your view on when the U.S. Federal Reserve will start raising rates? The government has already started to wind down its bond buying program.

MD: We think the Fed will begin to hike rates in mid-2022, with 100 basis point total rise in rates in 2022. We then expect a further 100 basis points tightening over the course of 2023.

TNM: What are your forecasts for average gold and silver prices?

MD: We have gold and silver remaining fairly elevated into next year. We have gold prices remaining above US$1,800 per ounce in 2022 — specifically around US$1,850 oz. In 2023 we forecast gold will average US$1,700 per ounce. Silver remains well supported and we forecast US$25 per oz. in 2022 and US$23 per oz. in 2023. That trajectory mirrors our outlook for inflation and monetary policy; as rates rise and inflation cools in 2022 and 2023, we expect silver prices to cool. But we also see industrial activity contributing to silver prices as well.

TNM: What about copper?

MD: We see it remaining above US$4 per lb. and near all-time highs. We‘re forecasting US$4.25 per lb. for 2022. There is this longer term greener energy shift, which should support pricing, so the outlook is still quite solid despite some of the risk we’ve discussed around moderating China growth and supply chain issues. 

Prices for copper are pretty well supported with the global economic recovery. And over the longer run, we expect there to be a structural shortage of copper by the time we get to the middle of this decade. Copper is used in these green energy applications and electric vehicle consumption, so we see demand remaining quite strong. This is clearly a metal that’s going to be in high demand. And at the same time when we look at the pipeline of projects, there’s not much in the way of major capacity expansions expected in the next few years. As we get to the middle of the decade, we anticipate an imbalance between supply and demand will keep copper prices very well supported and that we’ll get to a price in 2025 of US$5 per pound.

On electric vehicles, the International Energy Agency estimates that the global EV stock will grow from about 11 million last year to almost 50 million in 2025 — which represents an average annual growth rate of more than 30% — under its stated policies scenario (that is, a scenario that incorporates policies that had been adopted by mid-2021). That implied increase in EV demand and production bodes well for demand for battery and green energy-intensive metals like copper and nickel.

TNM: What is your forecast for nickel prices?

MD: Nickel is very well supported. It has been very strong lately and will continue to be to the end of the year. A lot of that reflects that stainless steel demand has been recovering very strongly — stronger than expected — and that has driven nickel prices up. Over the next couple of years we see more moderate nickel prices in the US$8 per lb. range. That reflects expectations that nickel pig iron production will pick up quite significantly in Indonesia and contribute to more supply and rising inventories, which will overhang prices, even as demand for the metal is pretty strong. So for the next few years we see a surge of physical surplus in the nickel market globally, even as demand remains strong. Over the longer run, the prospect for nickel prices are quite positive, given that nickel is used intensively in electric vehicle battery production. So in the next few years supply growth should keep prices from rising too much. But demand prospects for it are quite strong over the next few years and into the future. We see US$8 per lb. for nickel in 2022 and US$7.50 per lb. in 2023.

TNM: Do you look at the iron ore market?

MD: Our projections for 62% iron ore is US$160 per tonne this year and US$110 in 2022. Prices reached record levels earlier this year and have fallen back since then. What’s been behind that are the curbs on steel production in China. Iron ore is a key ingredient in the production of steel and China has cut back on steel production because it is looking to reduce emissions in the lead up to the Winter Olympics. They want to have higher quality air when athletes come in and participate in the Games next year. So the price decline is a temporary thing. But it has led to less steel production, which means less demand for iron ore, and has contributed to the big price decline we’ve seen. But broadly speaking, we expect we’ll start to see iron ore demand pick up a little bit as we get closer to the Winter Olympics and after them. They’re taking place in February, and we should have more durable price gains in the second half of next year.

TNM: Spot uranium prices have had a pretty good run this year. What is your forecast?

MD: For uranium, we expect prices to rise to US$40 per lb. next year, then gradually climb towards US$50 per lb. by the end of this decade. In the next few years, supply constraints should contribute to upward price pressures — we only expect output from Kazakhstan to begin to rise materially in 2024 and production from the idled McArthur River mine in Saskatchewan to restart in 2025. Beyond then, we see potential for demand to grow more durably as nuclear power is increasingly adopted as a viable green energy source.

TNM: Thanks Marc!

*This interview has been edited and condensed.