Surf’s up: Let’s ride (April 25, 2011)

When you ask Richard Briggs what he’s telling his clients about investing in base metals these days, he answers: “We’re advising caution – lots of caution.”

The Montreal, Que.-based vice-president of Lind-Waldock Canada, a division of MF Global, argues that prices are high and there is a “reasonable possibility” of an economic slowdown this spring and summer with the starting point in Asia. Governments from India to Korea and Taiwan to Vietnam are starting to fret about inflation, he argues, and are going to take serious measures to stem the tide.

“Everyone is very, very concerned about inflation, particularly as it affects food and fuel, which is what everyone spends their money on,” he reasons. “Once prices get out of control and these governments have problems with stability they have to deal with the situation and metals will pay the price.” 

Briggs reckons the slowdown he envisions will last about six months and “could be significant.” But it’s not just about inflation, he argues.  Major supply disruptions for everything from automobiles to electronics as a result of Japan’s earthquake in March will slow down industrial activity around the world.

“Whole industries in Japan have been knocked flat,” he says.  

“We’re not piling into metals for speculative purposes right now, we’re not aggressively taking the other side either, we’re just really cautious and expect prices to fall in the near-term.”

The good news is that Briggs expects things to start picking up again in October – once Japan starts to rebuild its broken economy.

Not everyone, however, is as gloomy about the immediate outlook for base metals. 

Sean McGillivray, vice-president of Oregon-based Great Pacific Wealth Management, with a special interest in copper, says higher prices have only given way to even higher prices and so far he hasn’t seen any “meaningful demand destruction” – or the first sign that the market is starting to lose steam.

At the start of the year, McGillivray says he had a 2011 price target for copper of US$4.75 to US$5 per lb. Copper was trading at about US$4.20 per lb. when he made the original price target, he says. 

“We’re not going to be calling for a buy in this market until we get above the US$4.45 per lb. mark but if we do, I anticipate US$4.65 to US$4.75 per lb. copper in 2011,” he says.

McGillivray sees growing demand for copper in Asia – currently the world’s largest buyer of the metal – as well as potential demand growth in Europe.

“Depending on the recovery in Europe, it could become a major buyer as well, which would put higher pressure on prices,” he says, although he admits the “profound gap” or dislocation between the region’s sounder economies like Germany and France and its weaker counterparts like Portugal and Spain, will continue to make the region volatile.

“Germany’s export numbers have been quite strong and they could be a big consumer of industrial metals but the whole Euro zone is being called into question so there will be some volatility going forward.”

David Chellew, an associate portfolio manager at Burgeonvest Bick Securities in Toronto is predicting relatively strong prices for copper until 2014. He sees prices staying in the US$4.50-to-US$4.80 per lb. range. “I’m looking at copper prices not easing for the next two years,” he says. “I don’t see a lot of new supply coming along and copper projects are capital
intensive.”

And if commodity prices remain high the industry will start seeing a lot of new marginal production coming on stream, he adds. Demand is hard to forecast – particularly from countries like China – but he admits to being surprised at the speed of the global economic recovery and, in particular, that it was driven not by the developed countries but by developing ones, which should continue to buoy industrial metals as these countries build infrastructure.

As for the current super-cycle for metals, Chellew estimates that the industry is more than halfway through it.

“When I went to the PDAC this year I saw more companies with (NI) 43-101 resources than I have at any time before,” he explains. “People are raising money on bankable feasibility studies. I’m
not seeing any greenfield exploration – exploration isn’t a priority. I’m seeing people looking for resource development money and that’s usually a sign that we’re about two-thirds of the way through a super-cycle… I think we’re in a more mature market
than we were in 2007 or 2008.”

For now, Chellew says he remains “cautiously optimistic” about the outlook for base metals and in particular copper over the next 24 months.

“It’s like being a surfer. The surf’s up, let’s ride it, but let’s be smart about managing our risk.”