https://www.miningweekly.com

Unexpected headwinds keep commodity prices lower for longer

7th March 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

Font size: - +

TORONTO (miningweekly.com) – A faster-than-expected slowdown in demand for commodities in 2015 has placed a damper on broad-based commodity price recoveries in 2016, compounded by lacklustre global economic growth and record inventories, which will take time to work down as production cutbacks and mine closures take effect.

Analysts representing the world’s top market intelligence firms were talking about commodities and the market outlook in Toronto on Sunday, on the first day of the yearly Prospectors and Developers Association of Canada’s convention – the largest mining show on earth.

Kicking off the afternoon session was Randgold Resources chief executive Mark Bristow, who outlined future strategic paths for mining companies in today’s new environment. He examined the challenges inherent in reconciling the industry’s essentially long-term nature with the market's short-term demands and explained that the definition of growth was not immutable but changed from stakeholder to stakeholder and at different points in the price cycle.

Bristow also suggested that the scene was set for new entrants into the industry, whose fresh perspective should give them a significant competitive advantage over companies still encumbered by traditional thinking.

NICKEL
Wood Mackenzie principal nickel analyst Andrew Mitchell explained that 2015 was worse for nickel from a demand perspective than 2014, and that 2016 looked even poorer from a price perspective, as demand remained lacklustre. In 2015, demand grew by only 0.9%.

Mitchell pointed out that there were not as many nickel mine closures in 2015 as originally expected, as miners were able to lower costs – boosted by lower oil prices – and because the nickel price did not quite move low enough for long enough to push higher-cost miners out.

“[Last year] was not that bad, and that’s the bad news,” he said, pointing to only a few of the more expensive sulphide mines shuttering in 2015, while laterite mines were proving their low-cost worth.

Prices came increasingly under pressure towards the end of 2015 and global inventories of at least a million tonnes of nickel absorbed any demand increases. The supply overhang was enough to supply the market for half a year.

However, a long-term structural shortage would appear from 2021, when a deficit of about 475 000 t would keep the nickel market reasonably balanced through to 2030. New production would be required to come online during this period, but Mitchell questioned whether there would be any significant new investment before then.

To make up the deficit, he expected Chinese investment in Indonesia to account for about 260 000 t of new nickel output in the next decade, while new innovations and investment in the West would account for the balance. However, this would require an incentive price of between $9.50/lb and $10/lb.

DIAMONDS
Dominion Diamond Corporation executive VP for diamonds Jim Pounds said that prices for the rough precious gems fell 13% in 2015 – evidence that the global diamond market was changing.

He noted that the market’s compound annual growth rate (CAGR) between 2009 and 2014 was 5%, but that the CAGR had fallen to only 3% for 2013/14.

In 2016, global diamond output was expected to hit 150-million carats and then fall back to about 100-million in 2030.

Pounds said the financing situation, which was until recently a hindrance to the market, was stabilising; however, the future production pipeline remained limited as the market became more driven by the fundamentals of supply and demand.

SILVER AND PGMS
Commodities analyst Thompson Reuters GFMS director of precious metals mining research William Tankard said that the silver price was expected to climb by 8% or more in 2016. This would be driven by mine supply weaknesses expected to start showing this year, while scrap had been weak for some years.

He noted that speculative investment interest was at historically strong levels in 2015 and that retail investment was also at an all-time high.

While low current prices could continue to see jewellery and silverware consumption, these were not price drivers.

Silver, which had the dual roles of being a precious metal and an industrial metal, had suffered under a 23.3% industrial demand pullback in 2015 (excluding photographic applications), as weakness from industrial sectors, especially in China, weighed on price performance. Growth sectors for silver industrial demand included photovoltaic applications and ethylene oxide catalysts. However, this was tempered by ‘thrifting’ – the practise where manufacturers aim to use less of a metal for the same purpose.

Regarding platinum-group metals (PGMs), Tankard noted that the platinum market would be flat in 2016 at about 7.46-million ounces, and that it would see a slight deficit. Palladium supply was also expected to remain flat this year at 8.59-million ounces, with a market deficit of 1.13-million ounces.

He noted significant uncertainties about water security and the 2016 round of wage negotiations looming in South Africa, the world’s largest PGM producer. He said opacity in PGM stock levels weakened investor commitment and fuelled disenfranchisement.

GOLD
Dundee Capital Markets chief economist Martin Murenbeeld said that he expected the gold price to end 2016 around the $1 234/oz mark, as a topping-out of the greenback strength, sluggish global economic growth, rising global debt and “wobbly” equity markets impacted on the precious metal’s price performance potential.

Gold’s technical chart had recently seen a ‘golden cross’ – when the 50-day moving average for gold futures crossed above the 200-day moving average, a relatively rare technical event, which some gold bugs believed could signal the start of a longer-term uptick in the yellow metal’s price.

He noted that history had shown that each time global economic growth had fallen below 4%, commodity prices suffered. As such, the global economy remained a headwind for gold in 2016.

Murenbeeld also pointed out a surprise uptick in exchange traded fund (ETF) gold buying activity so far this year which, to date, totalled about 260 t. If this was sustained, it could point to a reverse of the massive ETF outflows of gold seen in 2013.

ZINC
CRU Consulting managing consultant Philip Macoun said that a market improvement for zinc did not materialise in 2015 as expected, and the price, in fact, declined.

More price-induced mine closures were possible in 2016, as real cash prices flirted near the real cash cost curve below $1 500/t.

As with nickel, the market was dealing with a significant inventory overhang of about two-million tonnes. While 2015 saw the zinc market in a modest deficit, 2016 would see the supply gap widen, chipping away at inventory levels and driving price performance “very soon”.

Macoun noted that smelter bottlenecks could become a problem in 2019/20, adding to constrained supply dynamics.

COPPER
Wood Mackenzie principal analyst for copper Paul Benjamin told attendees that copper was losing about 1.25% to 1.5% of demand growth a year owing to metal substitutions by aluminium and other metals.

He explained that while Chinese economic growth slowed as the country transitioned from an industrialised economy to a services-oriented economy, the world’s largest user of the industrial metal would still use substantial amounts of the red metal, as ongoing urbanisation called for more infrastructure development.

He forecast that Chinese demand still had room to grow, as it consumed about 8.25 kg per capita. Benjamin expected this figure to grow to about 11 kg/capita by 2035, but remain below advanced economies such as Germany, Japan and the US, where the figures were estimated to stand at 16 kg, 14.25 kg and 15 kg per capita, respectively.

According to Benjamin, copper prices, which had shed about 20% in 2015, could see a slow recovery in annual average prices after 2016, as the market became used to a ‘new normal’ of slower global economic growth despite volumes remaining significant. New mine supplies would be required from 2020 onwards, he stated.

Edited by Samantha Herbst
Creamer Media Deputy Editor

Comments

The content you are trying to access is only available to subscribers.

If you are already a subscriber, you can Login Here.

If you are not a subscriber, you can subscribe now, by selecting one of the below options.

For more information or assistance, please contact us at subscriptions@creamermedia.co.za.

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION