Commodities | Apr 27 2007
By Chris Shaw
This time of year is traditionally a good period for metal prices, helped both by the fact Chinese demand tends to recover as the country gets back to work following its New Year celebrations and construction activity in Europe and North America increases as the weather warms up.
With such a background for prices a number of experts have updated their views on the outlook for commodity prices, among then BMO Capital Markets chief economist Dr Sherry Cooper.
Cooper expects the near-term outlook will again benefit from seasonal factors, but cautions metal prices are likely to edge lower over the course of 2007. This is not a major cause for alarm though, as average prices for the full year should still be relatively high compared to historical levels thanks to the combination of low inventory levels and solid demand.
Canadian broker CannacordAdams takes a similar view and with the exception of zinc has lifted its price forecasts to factor in what it sees as a higher peak before increased supply comes through and pushes prices lower longer-term.
Its decision to cut its zinc price forecast reflects its view while the market for the metal will be in deficit it will be a smaller deficit than is generally expected, which would be a less bullish outcome, a view shared by Fortis Group.
CannacordAdams has lowered its zinc price estimate for this year by 18% to US153c per pound, while for 2008 it is forecasting an average price of US173c per pound. In contrast, market consensus is at US172c and US142c per pound respectively, while BMO Capital Markets stands at US180c per pound and US160c per pound.
BMO expects nickel prices to trend lower on the back of lower stainless steel production, growing substitution in the stainless steel market and some marginal supply increases. The good news if it sees prices remaining at what would be historically high levels.
Its forecast for 2007 is US$18.00 per pound this year then US$15.00 per pound next, while CannacordAdams expects prices of US$17.19 and US$14.50, and consensus stands at US$13.89 and US$11.36 per pound respectively.
Fortis is more bullish and sees the nickel price as more likely to hit higher levels than fall in the medium-term as the supply response continues to experience delays. As an example it notes CVRD’s Goro project in New Caledonia that was slated to begin production in 2009 now doesn’t seem likely to commence operations prior to 2011.
While the market, BMO and Fortis Group are factoring in a surplus in the aluminium market this year the broker sees the market as roughly in balance, though BMO notes the solid levels of industrial production and restrictions on Chinese exports should prove supportive to prices.
It expects the metal to average US120c per pound this year and US110c per pound next year, compared to consensus of US117c and US109c and CannacordAdams forecasts of 122c per pound this year and US104c per pound in 2008.
According to Dr Cooper the short-term outlook for copper prices is good, as strong demand should underpin the price of the metal through the June quarter. Fortis is not so sure, suggesting the surge in buying to start the year is unsustainable over the remainder of 2007 as it was driven by Chinese buying to replenish stockpiles and as such will ease as the stockpile situation is addressed.
After the middle of the year BMO sees the outlook as becoming less favourable, as increased supply is expected to slowly take its toll. It expects average prices of US270c per pound for 2007 and US230c per pound for 2008, while CannacordAdams is at US293c per pound this year, having lifted its forecast 17% to account for the potential for disruptions to impact on the expected supply side response. For 2008 the broker expects an average price of US263c per pound, while consensus forecasts are for US272c this year and US245c next year.
For those following the gold market Fortis points out physical offtake remains the crucial element, as to date it has shown a tendency to weaken as the metal’s price approaches US$700 per ounce. The group suggests a period of stability in prices is needed to convince the market US$600 per ounce is a sustainable floor, but short-term it sees the price as fluctuating between US$630-US$680 per ounce. BMO is more positive, forecasting an average price of US$700 per ounce this year, increasing to US$750 per ounce next year.
Among the other metals CannacordAdams has also made several adjustments, lifting its estimate for peak prices for uranium to US$135 per pound from US$115 per pound previously, though its long-term forecast of US$50 per pound is unchanged. Iron ore has been revised higher, as having previously expected prices to fall in 2009 it now sees current prices as rolling over in each of the next two years. Again, longer-term it is not quite so bullish as it expects prices to settle at levels 20-30% below current prices.
Having previously expected coking coal prices to fall 5% in 2008 the broker now expects a rollover next year, but continues to forecast a 5% decline in 2009.
For those worried about when metal prices may fall and can resource share prices be sustained, the story seems to be yes prices may come off their peaks but compared to historical levels average prices will be quite high, which is supportive for the earnings outlook for mining companies.