General | Feb 03 2006
And so it goes on. Resources analysts are resigned to the fact that no matter how high they set their metals price targets, they seem to be exceeded. Macquarie, for one, notes that while the analysts had set forecast commodity prices “well above market consensus” spot prices are now “comfortably ahead” of those levels.
GSJB Were reports copper continues its relentless rise, its price increasing by 23% this year. This still doesn’t hold a candle to zinc, which is up 40%. Nickel should have been more tame, given an excess of Chinese stainless steel but no – it’s up 14.6%. Even dour aluminium has risen 10%.
SB Citigroup analysts had been looking for a pullback in the near term but even they have relented, suggesting their stance is now “less cautious” on the magnitude of the “expected” metal price correction.
And it’s not just base metals. Gold is continuing its push towards US$600/oz while speculative buying ahead of a silver ETF listing has seen that metal shoot to a record US$11.45/oz.
Metals prices are meant to be cyclical in nature. When demand increases (eg China) then mining, exploration and refining capacity is always stepped up to capitalise on higher prices. There is a lag time, and then this new supply begins to hit the market and prices start to fall once more. That is what was meant to happen, but it hasn’t.
Instead, Chinese demand in particular has continued to outstrip original estimations. At the same time, the supply side has been painfully slow to get going in some resources, or simply insufficient to keep up with demand.
At some point the supply side will begin to catch up, but while analysts have been awaiting this outcome they all presently tend to agree it won’t happen soon. Looking ahead reveals only a series of supply disruptions.
Macquarie notes a recent labour strike at Grupo Mexico’s significant La Caridad copper mine is a portent of things to come. Mining companies have been posting record profits. Mine workers have been in extreme demand. Over the course of this year, wage negotiations are due for major mines in Chile, Peru, Canada, Norway and Australia.
It is hard to see mine workers not taking advantage of the leverage they hold. In the meantime, mining companies will be fiercely attempting to protect their newfound profitability. The potential for more strikes is fairly strong.
On a metal-by-metal basis, GSJB Were informs that not only has the copper price surged on the back of the Mexican strike, it has also been driven by news from Indonesia’s Batu Hijau mine that copper production will now be 45,000t less than the original 2006 estimate. Copper inventories remain very tight.
Zinc is also very tight, but there is some light at the end of the tunnel. Weres reports Grupo Mexico’s San Luis Potosi smelter, with a capacity of 107,000tpy, has been closed since earlier in the year due to electrical overload, should reopen soon. So too should the Korean-owned Big River Zinc mine in the US, which has remained closed pending price negotiations. Supply relief is also at hand when Herald Resources (HER) begins production at its 120,000tpy Indonesian Dairi mine.
The nickel outlook is not so certain, says Weres, as although demand for stainless steel appears to have picked up again after suffering from massive Chinese production, but it may only be a case of restocking.
Aluminium continues to lag behind copper and zinc, largely due to an easing in the tightness of the alumina market. Chinese smelting capacity is set to increase dramatically, and this should see relief for the aluminium price.
Nevertheless, Macquarie analysts are forecasting commodity prices to remain strong throughout 2006, with only silver and copper sitting at forecast prices below the current spot. This is due to the strike having a short term effect on copper and the EFT on silver.
SB Citigroup has copper and aluminium prices rising over the next few years, before aluminium slips back. The analysts do see the nickel price under pressure, but zinc remains number one. Their order of preference for 2006-07 is zinc, aluminium, nickel, copper, switching to zinc, copper, aluminium, nickel in 2008-09.
While Citi is still looking ahead to base metal price weakness eventually, the analysts remain bullish on the bulk commodities (iron ore, quality coking coal, thermal coal and alumina) and on precious metals.
Citi’s sector picks in Australia are the diversifieds – BHP Billiton (BHP) and Rio Tinto (RIO) – as well as Alumina (AWC), Minara (MRE) for nickel, Macarthur Coal (MCC) and Newcrest (NCM) and Lihir (LHG) for gold.
Citi has put Sells on Croesus (CRS) which has hedging problems and is currently suspended and Jubilee Mines (JBM) which the analysts think is overpriced.
Macquarie disagrees on Jubilee, including the stock amongst its own preferences. Macquarie is not concerned that the ASX Resources Index is up 15% this year, and has singled out Jubilee for nickel, Kingsgate Consolidated (KZL) for zinc and copper, Oxiana (OXR) for copper, zinc and gold, and prefers Lihir to Newcrest and likes Agincourt (AGC) in the smaller gold miners.
While on the subject of BHP and Rio, UBS notes both have been involved in significant share buybacks and that a lot of the participants would have bought back in due to a lack of alternative attractive propositions.
