Commodities | Dec 11 2006
By Rudi Filapek-Vandyck
Independent forecaster and industry analyst BIS Shrapnel believes price falls for most commodities will be gradual from here on with a likely collapse seen in the final quarter of 2007 as changing market dynamics for 2008 and 2009 will become apparent.
Nickel, copper and zinc are forecast to experience the largest price falls between now and then.
BIS Shrapnel also forecasts the Australian mining investment boom has at least one to two more years to run, in a cycle that has seen mining investment more than triple over the past five years.
The forecaster believes the enormous amount of work in the pipeline and with several more projects still to commence total investment by the mining sector should still rise by circa 11% over the next two years. BIS Shrapnel foresees a peak in investments during 2007/08.
The forecast comes with higher levels of exploration expenditure for the coming two years with mining output seen as set for a phase of strong growth as capacity finally comes onstream.
Senior economist Richard Robinson cautions, however, the mining boom is being held back by shortages of skilled labour and materials, which are causing cost blowouts and delays. “These higher construction costs, combined with lower commodity prices expected later this decade, will challenge the economics of the next round of projects,” says Robinson.
BIS Shrapnel forecasts high commodity prices will be sustained into 2007, though some easing is expected over the next year following the record levels reached during 2006. The same Robinson again: “As mining projects are completed, supply comes onstream and inventories are re-stocked, commodity prices will begin falling, particularly after speculative activity drops-off.”
The forecaster believes price prospects for 2008 and 2009 could be materially different as a slowing world economy and a significant increase in global production are likely to result in an oversupply for some commodities. This could lead to “dramatic price falls”.
BIS Shrapnel believes the largest declines in commodities in US dollar prices will be nickel (forecast price fall 60%), copper (minus 59%) and zinc (minus 46%) over the next three to four years. Price declines in other commodities over the same period are expected to be in the order of 20 to 40%.
The independent forecaster highlights that even after the predicted declines, prices for individual commodities in the next trough later this decade will still be 50 to 100% above the levels of the previous trough of the early 2000s, with the exception of aluminium. BIS Shrapnel believes the aluminium price won’t fall back to those low levels due to continued buoyant Chinese demand and because the cost of operating a mine has increased considerably over the past few years.
Some of the US dollar declines are expected to be partially offset by a projected depreciation in the Australian dollar from US$0.75 in 2006 to US$0.61 in 2009. The Australian dollar is expected to particularly decline in value from late 2007 as commodity prices are seen collapsing while the current interest rate cycle will be peaking.
The main risk to this scenario comes from China where a potential serious downturn would cause a bigger correction in prices, investment, exploration and production, the forecaster believes.
BIS Shrapnel is forecasting a sharp downturn in investment between 2008/09 and 2010/11 in Australia.
The other main issue which will affect the mining sector over the long-term is greenhouse gases, says BIS Shrapnel. With technologies such as coal sequestration and ‘clean coal’ at least a decade away, coal investment is expected to drop from current unsustainably high levels, and could remain subdued for a number of years. In the meantime, LNG and gas-related investment will remain buoyant, as the global energy mix increasingly switches toward gas and nuclear.