Base metals prices have made a comeback this past year that would make pop-music diva Whitney Houston jealous. After taking a steep dive early in 2009, base metals prices have risen back to almost pre-recessionary levels. And although fund managers say prices will continue to rise in 2010, they warn prices may not reach the peaks of 2008.
Take a look at copper, for example. In just 10 months, copper prices have come roaring back. The spot price jumped by 104% to $3.08 a pound on Dec.15 from its trough in February, in which it had a monthly close of $1.51/lb., one of its lowest price points in five years. (All figures are in U.S. dollars)
“Despite the price appreciation, these prices are not back to peak 2008 levels,” says Paul Vaillancourt, senior vice president and director of portfolio strategy, managed investment solutions, with Franklin Templeton Investments Corp. in Calgary.
During July 2008, copper traded at more than $4/lb. Although the rally will continue, Vaillancourt says, there’s a long way to go before copper is trading at that level again.
So far, a series of mine closures worldwide has been the “big swing factor” that has resulted in the rebound of base metals prices, says Bob Lyon, senior vice president and portfolio manager with AGF Funds Inc. in Toronto. This has created a much needed correction on the supply side.
“In the past four to five years, there has been a fundamental shift from a situation of oversupply of base metals in the 1990s to one that’s much more balanced,” says Lyon. Due to the mine closures, he adds, base metals prices are now aligned, with supply and demand more equally weighted.
In addition, China has been driving demand, says Patricia Mohr, vice president of economics and a commodities market specialist with Toronto-based Bank of Nova Scotia. China now consumes about 37% of all of world’s supply of key base metals, she says: “It has only been within the past two years that China has become a much more important buyer.”
Typically, base metals prices don’t recover until about two years after a U.S. recession, says Mohr. However, now that China is such a major player, there is no longer a need to wait for the U.S. economy to rebound. The U.S. consumes about 11.5% of the world’s total base metals production, says Mohr, barely one-third of China’s consumption.
Because of the U.S.’s lower base metals consumption levels, the country will become a much less important player in the long term in stimulating demand for these materials, Lyon adds: “The growth of demand in the long term is still going to be driven by the emerging markets, China being the biggest player.”
Other emerging markets of note, he adds, are Brazil and Malaysia.
Beyond China, a weaker U.S. dollar “has propelled a lot of investors to consider base metals as an alternative asset class,” says Vaillancourt. This is because a lower US$ means more favourable commodities prices for foreign buyers. Consequently, the worldwide demand for commodities will increase, and prices shoot up even further.
Government stimulus packages focused on infrastructure spending in the U.S. and Canada are added insurance that demand for base metals will grow, Lyon says: “Infrastructure spending is one of the No. 1 ways for governments to spend the money needed to climb out of the economic slowdown.”
Base metals such as copper and nickel are prime beneficiaries of infrastructure projects, as they are the primary materials needed to build the pipes in new buildings and steel in sewers.
Taking these factors into account, here’s what experts predict for base metals prices in 2010:
> Copper. As real estate markets around the globe recover, copper prices could jump substantially, Lyon says. He suggests they will go as high as 10% above the current $3/lb. levels. “Copper is the first base metal investors go to because its uses are so wide-ranging,” says Lyon, as it’s used in pipes and wiring needed for construction in houses and buildings.
However, because China’s state reserve bureau stockpiled base metals in the earlier half of 2009, Mohr expects some pullback in the price of copper for the first three to six months of 2010.
“China’s imports in the next several months are going to ease,” she says, which could cause prices to dip temporarily.
Overall, Mohr is calling for copper to range between $2.95/lb. and $3.15/lb., depending on how much of a pullback happens.
> Nickel. The picture isn’t pretty for nickel, a key component in stainless steel, in 2010. Its price has been declining slowly since May 2007, when it traded at more than $23/lb. On Dec. 15, it closed at $7.58/lb. Mohr believes the price could drop to as low as $7.45/lb.
“[The] stainless-steel market, globally, remains on the soft side,” she says, while noting there has been some recovery in China and Western Europe on the demand side. Further price dips depend on the progress of miners’ strikes at Vale Inco’s nickel mines in Sudbury, Ont., and Voisey’s Bay, Labrador. Combined, these two mines produce 10% of the world’s nickel supply.
“The strikes temporarily tightened up global supply,” says Mohr. “But once the strikes end, nickel prices could move down a little. Any fallback is going to be temporary.”
> Aluminum. This lightweight base metal is used for applications in buses and airplanes. Lyon expects the price of aluminum to rise to between $1.05/lb. and $1.10/lb. from its closing price on Dec. 15 of $1/lb.
“Although we like aluminum and zinc the least in the short term,” he says, “they will pose the best recovery.”
In the past year, the price of aluminum has risen by 64% to $1/lb. from 61¢/lb. in February 2009, its lowest price in five years. Aluminum mines across the globe have been shut down due to low prices and demand for the metal.
“Those memories are still fresh in the minds of producers,” says Lyon — and that has caused supply to remain depressed. It will take a period of sustained demand and higher prices, he adds, before suppliers expand production.
> Zinc. The price of this base metal could rise as high as $1.13/lb. in the first quarter of 2010 from $1.03/lb. on Dec. 15, Lyon says. A “late cycle” metal, zinc prices don’t usually recover until after the economy has rebounded, he adds, and typically after copper.
Zinc’s late recovery this time around is a result of its secondary industrial applications, such as in galvanizing steel and acting as a catalyst in forming rubber. IE
Will base metals prices continue to ride the wave?
After a major fall and a surprising comeback in 2009, prices of base metals appear to have stabilized for the year ahead
- By: Olivia Glauberzon
- January 7, 2010 October 31, 2019
- 13:38