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Base Metals
Bottom nears as China lays foundations for future bull run, says Mohr
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19th November 2013
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TORONTO ( – Scotiabank believes the bottom for key base metals commodities is approaching, although 2014 and 2015 are likely to remain lacklustre, Scotiabank’s VP economics and commodity market specialist Patricia Mohr told delegates at the Mine Latin America conference last week.

“I think we’re approaching the bottom in this cycle … I’m hoping that we’ll see the bottom for some of the key base metals in early 2014,” Mohr said.

“I think it’s fair to say that the next two years are likely [to present] quite lacklustre conditions for many of the key base metals,” she added. “But I think the bull run in base metal prices will probably return in the second half of the decade.”


Mohr stressed the importance of China. “As an economist, I now spend more time looking at the outlook for China than I do for the USA,” she said.

“[In] September and October, China’s official PMI [Purchasing Managers Index] has ticked up again and is looking reasonably strong … Despite concern in financial markets, in New York and London, actual demand for base metals and iron-ore in China this year has been quite solid,” she added.

Chinese growth is expected to reach 7.7% for the 2013. “[And] remember that this is occurring off quite a high base of economic activity, so this means a lot for demand for base metals,” she said. “We show it technically slowing a bit next year [sliding] to 7.3% … But I wouldn’t be surprised to see it doing a bit better [than that].”

“A subtle shift in China is under way,” she noted. “They are no longer determined to have economic growth at any cost; they want economic growth which meets their objectives.”

The country’s new leadership has successfully taken over the mantle of power and will seek to stamp its mark on China’s direction, evolving its socialist market economy. “Going forward, we think there’s going to be more emphasis on more market-related solutions for China’s economy,” Mohr said.

She also underlined the importance of the new leadership group, which is likely to include China’s President, Xi Jinping, and will seek to develop further reform plans and skirt around vested interests.  “[There’s] a lot of interest in seeing the role of State-owned enterprises [SOEs] move down in importance with the private sector coming up. Personally, I think we will have to wait and see,” she said.

Another important factor that will have an indelible effect on commodities is the on-coming surge in China’s vehicle ownership, which stood at just 81 vehicles for every 1 000 people in 2012. This compares with the US’s figure of 794 cars for every 1 000 people.

“I guarantee that everyone in China wants to own their own motor vehicle … They are tripling the [number of] highways to allow greater vehicle ownership,” Mohr said. “This is going to be a great growth sector … It’s very metal intensive and very gasoline intensive.”


Mohr’s focus then shifted to the US, noting that a tapering of the quantitative easing programme is likely to start in 2014. “[But] probably not until March at the earliest, maybe April, but it will have to happen,” she said.

“Gold prices will take another hit when [tapering] is announced by the Fed, so another correction is coming for gold. I’m hoping that gold is going to stabilise and start to strengthen just a little bit over the next few years,” she added.

“I think it [gold] will average lower next year at $1 270/oz,” she said, also noting that Scotiabank had a forecast of $1 375/oz for 2015. “[But] I would be very conservative about what your forecast is for gold for the next few years; don’t go overboard on the upside.”

Looking back at the past year, Mohr noted gold prices were down by 22%. “This is not as negative as the decline in the gold in the TSX gold equities, [which] has had quite a profound impact on capital spending plans by gold mining companies [and] senior producers,” she said.

Mohr then highlighted silver exchange traded funds (ETFs) and their robust performance. “The holdings of silver ETFs in the US market are high, almost near record highs. I think that’s because of the huge interest by US retail investors in silver as an investment.”

“India is also very interested in silver and diamonds these days because of the restrictions the Indian government has placed on gold bullion imports,” she added.

Meanwhile, copper will face growing pressure as increased supply starts weighing on prices. “Copper is currently at $3.16/lb and has been hit in recent days because people realise new supply is gradually coming on stream,” Mohr said.

“[Copper] is probably going to move down to about $3/lb in the next 12 to 24 months. It could dip below $3,” she added.

Mohr was optimistic for zinc’s longer-term prospects. “I think [zinc] will be the next big base metal play because of mid-decade mine depletion around the world and because of probable smelter bottlenecks developing in China,” she said.

“It’s something [the juniors] should look at and get involved in,” she noted.

Mohr sees iron-ore on a lowering trend into the mid-term before going on to recover.

“The prices have been fairly profitable this year [and] China’s steel production is up 11% year-on-year as of September,” she said. “[But] I think we’re going to move into a more competitive landscape in the coming years, with prices moving from about $133/t delivered into China this year down to $90/t by 2016, and then recovery.”

“Longer term, the price will probably move up because China’s demand is going to continue to grow for iron-ore and for steel,” she said.

Edited by: Henry Lazenby


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Picture by: Reuters