Copper, Gold And Potash Are Top Picks: Scotiabank’s Mohr

Patricia Mohr is vice-president, economics and commodity market specialist, at Scotiabank’s executive offices in Toronto. Mohr is also responsible for commodity market research in Scotia Economics and developed the Scotiabank Commodity Price Index — the first index designed to measure price trends for Canadian commodities. Scotia Capital is the number one corporate mining bank in Canada and among the top two in North America.

The Northern Miner recently interviewed Mohr on the outlook for metals in the coming year.

The Northern Miner: What is your favourite metal going into 2010 and why?

Patricia Mohr: Over the next several years I think copper will remain my top pick for investors for two reasons. First, there was under-investment in new copper mines in 2007 and 2008 for a number of reasons, key among them the fact that many major companies held back on new mine expansion because they were worried about rapid capital cost escalation and whether or not copper prices would be high enough to justify very high new mine development costs.

The second reason is that a lot of the new mine capability is in Central Africa — an area where there has been some political instability and renegotiating of mining licences — and I think that has held back the pace of mine expansion. On a trend basis, we expect demand growth to remain quite good in emerging Asia, particularly in China. So while there is some near-term risk because China has restocked, I think the medium-term outlook will continue to look quite good.

T. N. M.: Where do you see copper prices heading?

Mohr: Copper prices have really rallied in quite an extraordinary way. Imports into China were at record levels in the first half of the year and that’s an exceptional development because the global economy for the most part was in deep recession in the first half of the year, particularly in the first quarter.

In early January, the market became aware that China’s Strategic Reserve Bureau was stockpiling copper and possibly a number of other base metals. China’s industrial activity really picked up quite markedly in March, partly because of Beijing’s infrastructure spending program, announced in November last year, and pressure on domestic banks to step up their commercial lending.

The net result, fabricators started to restock many base metals, especially copper, in the spring, and copper prices have continued to be very lucrative. Despite the fact that imports into China appear to be waning, copper on the LME (on Nov. 25) was US$3.11 per lb., which is extremely profitable for most mining companies. In the month of October, imports into China were down substantially from September (about 40% down month-on-month).

China may reduce its imports further in the next several months, particularly over the winter, having restocked an enormous amount of copper earlier this year, but I think at some point they’ll be back in the market again buying, probably by the second quarter of next year. China’s demand for copper is going to remain key next year because recovery in the U. S. economy is going to be a little subpar in 2010 compared to the pace of recovery that normally occurs when the U. S. comes out of recession.

My average price forecast for the LME official cash settlement price for copper is US$2.95 per lb. for 2010. In 2009, the average is going to be around US$2.32 per lb. Prices in 2008 averaged US$3.15 per lb. but peaked in early July at US$4.08 per lb., an extraordinary price for copper.

So overall, I’m quite constructive on copper. There could be a near-term pullback, but it’s not a foregone conclusion by any means because I think traders and investment funds are quite optimistic on the outlook for copper. It’s perception that really rules the price forecast, so it could turn out even higher than US$2.95 per lb. in 2010.

T. N. M.: Aside from copper, what other metals are looking good?

Mohr: Nickel prices are at fairly profitable levels but I think a lot of that reflects the strike at Vale Inco’s operations at Sudbury and Voisey’s Bay. I haven’t seen any recent news on the status of that strike, but obviously it has pulled about 10.2% of world mine supply out of the global marketplace and really bolstered prices. There has been the beginning of a pickup in stainless steel demand in the G7 including Western Europe, but it’s been a slow turnaround. Sixty per cent of nickel goes into stainless steel, which is highly dependent on global business capital investment. At this point in the cycle, business capital spending is not usually strong, so I think when the strike ends the price could go down, before rebounding later in the year.

T. N. M.: OK, what does your price forecast look like then for nickel going forward?

Mohr: Recently it’s been profitable. This year it’s going to average perhaps about US$6.85 per lb. — although that might be slightly high. In 2008, nickel averaged US$9.57 per lb. and in 2007, near the peak of the global business investment cycle, it was US$16.88 per lb. I have an average price of US$7.45 per lb. in 2010. That looks like a big decline, but prices would still be at profitable levels in today’s still fragile G7 economic conditions.

T. N. M.: What would be your third pick?

Mohr: Potash prices will likely rebound. They probably have one more leg to go down as the Bellorussian Potash Co. (BPC) negotiates its 2010 contract with China. Once we see a contract price negotiated down a little between BPC and China, which should come in the next month or so, that should restart the market. I think all prices will adjust down a little, not too much, but that will restart the market and shipments should begin to pick up again.

Over the course of the next year, potash prices and certainly shipments will start to rebound. And because farmers haven’t really been buying much potash over the last 12 months, the market has been waiting for prices to come down before stepping in and buying. The spot price at the Port of Vancouver in October was about US$480 per metric tonne. I think it will move down further, but I’m not sure exactly how far it’s going to decline. Prices should begin to rebound again by next spring and particularly in the second half of next year.

T. N. M.: What is your view on gold?

Mohr: I am constructive on the outlook for gold prices over the next three to six months. U. S. dollar weakness and stepped-up central bank buying are driving the price higher. I would expect gold prices will climb further over the next three to six months, until we see signs that the U. S. Federal Reserve Board is tightening monetary policy, and then you might get a pullback in the gold price. We’re expecting the U. S. dollar to move irregularly lower over the next six to 12 months and because of that, gold is likely to reach new record highs. I think investors will have to follow Federal Reserve Board policy quite closely. Of course, it’s also possible that even if the Fed tightens, the U. S. dollar might continue to be quite weak because of the massive U. S. budgetary deficit and difficulty in reining it in. I would not want to make any specific projections on timing, but the Fed will be tightening probably by the second half of next year and then we’ll have to gauge what the impact of that will be on the U. S. dollar.