Metals prices to remain strongMetal prices will fall – but when and by how much?
By: Charles Carlisle
Posted: '09-SEP-06 12:00' GMT © Mineweb 1997-2006
LONDON (Mineweb.com) --The IMF economists’ statements of earlier this week, and commented on here, make interesting reading in predicting a falling back of base metal prices in what they classify as the medium term. Medium term means different things to different people though. To some it means next year, but in the IMF’s case this seems to be referring to up to around 2010 which seems to be fairly long term as far as some modern day funds and financial institutions are concerned.
To be fair to the IMF speakers commenting on the organisation’s latest World Economic Outlook briefing, their timeline was spelled out and their forecasts are certainly not an unreasonable analysis – but with web news reports perhaps picking up the ‘medium term’ element and ignoring the more specific dates, investors scanning the web for information could easily be misled given the various potential interpretations of the terminology used.
There is a consensus that metal prices will indeed fall substantially from their current peaks – although gold shouldn’t figure in this forecast as the gold market is driven by completely different parameters. Base metals though surely will. The question is when, and by how much? While there are even more pessimistic forecasts out there for metals prices at the end of the decade, personally I’m not convinced by them.
Often forecasts are predicated on past patterns, but arguably current supply and demand patterns are unique. That’s not to say there won’t be an ultimately-drastic correction coming, but it’s almost certainly going to take longer to occur than in previous cycles.
Current metal prices are only now stimulating substantial new mine development and expansions. But as we have pointed out here before, there are constraints this time around that weren’t there to the same extent in previous boom cycles, in terms of equipment shortages and far more demanding planning, environmental and political controls on new mine developments.
On the equipment front for example - particularly importantly for the big open pit base metal mines that are necessary to replace and expand output of bulk mined ores like copper, bauxite and iron - there is a severe shortage of large off-road truck tyres that is unlikely to start being corrected until 2008 at the earliest. Trucks without tyres are about as useful as no trucks at all – except perhaps as spare parts for those which do have tyres!
But tyres are not the only product in short supply. Some of the capital equipment needed to mine and process the ore is currently commanding long lead times, while there is also a growing shortage of qualified and experienced engineers, geologists and operators worldwide. Other business areas are more attractive to today’s young.
Also, as world consumption of metals continues to rise, the amount of new capacity required just to replace current resource depletion is becoming ever greater. All this points to the inevitable downturn being much slower than in previous cycles, and probably not being as steep when it does occur as the supply and demand pattern is changing.
So where does this leave us now? The IMF forecasts copper, for example, coming down to $1.50 per pound by around 2010 as against a current $3.60. Given that most copper mine feasibility studies would be based on perhaps a copper price of between $1.00 and $1.20 this still leaves room for some pretty good profits from the mining companies. But will the price fall that low in the IMF-defined medium term. It may well come down to that level (in today’s money) at some time, but perhaps not as soon as 2010.
The run up to current high (perhaps exorbitant) price levels has taken place over a four year period, prior to which significant new mine development was not an attractive proposition because prices were so low. Meanwhile the long lead time involved in bringing a MAJOR source of new production on stream, which is usually well over five years, arguably means that significant new mine production over and above replacement output, may only just be starting to materialise by 2010.
China is going to continue its strong demand unless there is a catastrophic world recession, and other countries like India are still on the upwards consumption path. This suggests that prices may remain highish – probably not at current levels – until towards the end of the decade, and possibly for several years beyond that. With continuing production cost rises from mining ever leaner grades of ore, and labour costs and fuel and power costs all rising far faster than inflation, $1.50 a pound copper may be needed just to keep even some of the more efficient mining operations profitable by the middle of the next decade!
The scenario for bauxite and aluminium is even more positive depending from whose side you are viewing it. With energy prices ever rising, the sheer cost of energy-dependent aluminium production will ensure that prices, if not profits, remain relatively high.
Nickel is another metal where prices are riding high through major stock shortages. It is even more difficult to bring in significant supply increases in the short term here as much of the new supply potential is in oxide and lateritic ores, which tend to be extremely complex to process with corresponding longer lead times to bring a new project to fruition.
Perhaps it is only with one of the current mega-performers, zinc, that the scenario may not be quite as positive for the miner because, as Clare Hassall of CHR Metals pointed out at the Mining Journal 20:20 zinc conference in London last week, much of the world’s production comes from smaller high grade deposits which can be simpler, and quicker, to bring into production. But even so, feasibility studies, permitting, mine construction assuming suitable plant is available and sourcing experienced operators, all takes time, so here again a steep fall-off in price due to rapid supply increases looks unlikely. Hassall is looking for a steady fall over the next two to three years to a low of $1,500 per tonne – a little less than half current levels, but given the scenario she paints of difficulties in getting new projects off the ground, then this low may take longer to materialise – and it would still be about double the low prices for the metal of only three years ago!
So, maybe investors should take some of the current price scenarios being put forward by some analysts with a pinch of salt. There still remains huge pressure on metal stocks and that is not going to improve quickly. In the short term – maybe six months to a year – prices are likely to remain high and then start to drift downwards as new supply does begin to come on to the market. There is a good chance that demand will remain strong throughout, indeed may continue to increase, maintaining pressure on stocks and prices. So don’t sell short yet!
And as for gold supply and demand – well that’s another story altogether!