BMO’s Colin Hamilton looks at the year ahead

As a commodities analyst for BMO Capital Markets, Colin Hamilton covers base metals, bulk commodities, precious metals and battery raw materials. He also focuses on China and global trade flows. The analyst, who has a background as a metallurgist, spoke to The Northern Miner about his thoughts on the year ahead.

The Northern Miner: What do you see as the key themes in the new year?

Colin Hamilton: Well, we’re coming off 2021 which has been phenomenal in terms of demand. I mean, the demand impulse that we’ve seen over the past 12 months? We haven’t seen it before in history, in terms of the absolute levels of rate of change of demand, and the supply side has struggled to keep up. Now, as we move into a normalization phase of the cycle, we would expect industrial production growth rates to start trending lower. In fact, we’re already past peak in that regard, with some of the supply chain bottlenecks starting to ease. But inflation is still very much at the forefront.

TNM: How do you see inflation impacting the mining industry?

Colin Hamilton.

CH: Inflation causes some interesting issues and is good for the precious metals, but for base metals that does tend to hurt demand. For both base metals and steel we would expect some of the end consumers now to be pushing back a little bit more. The very strong consumer durable goods cycle we’ve had over the past 12 months is now waning. We’re still trading at very good prices, relative to historical norms, and relative to what we term mid-cycle. And we will remain there, above normal, until we get some of these factors that are almost extraneous to commodities themselves — containers, power issues, weather — until we get past all of them.

TNM: What about deflation?

CH: Yeah, let’s talk deflation. First because deflation and metals mining as often comes from China. If you think of that ‘China business model,’ it is to buy raw materials to have enough capacity to process them domestically, and ideally, export some of the finished product as an inflation hedge or shipping deflation to global markets. There’s going to be a lot less of that going forward. Over the past six months we’ve had very weak Chinese steel demand and record global steel prices. And Chinese exports have fallen. We would never have thought that before. And we may get some China offshoring of capacity, which can offer some deflationary prices. But what’s interesting to me is that normally when the inflation cycle starts turning and you start to get this destruction of demand, you start to get the shock through the entire manufacturing chain. So you almost amplify the impact. Now, will we see that? I don’t know. I do think that many end users of metals at the current time of industrial metals are sitting with a lot of material on the balance sheet.

TNM: What is your forecast for mergers and acquisitions in the base metals sector?

CH: Compared to the gold industry, base metals have been a bit behind. And then you have many of the major companies and major diversified companies trying to reshape that portfolio. Iron ore [is] a great margin business, not really a growth business, particularly as we are in a world where we’re going to get a lot more scrap coming back over time. And whereas obviously some of the metals are more exposed to the energy transition, that’s where they want to grow. That’s where they want to be positioned. And that process was started two or three years ago at the high level, and then it’s been steadily working its way through the chain. I think with base metals it was already more consolidated anyway. But what we haven’t seen is actually that much activity. So I just think there’s another round here, particularly in areas like copper and nickel, those commodities where there’s a good growth profile for you. We’ll see. I do think there’s opportunities there for M&A.

TNM: How would you characterize China’s influence?

CH: China is still going to be the biggest issue facing mining in a five-year view. We’re entering a new era in China, where growth for growth’s sake is maybe a little bit less the mantra and now they are moving towards quality of growth, they are trying to move up value chains, trying to offshore certain nasty parts of metals and mining processes in many cases. And their influence is still very much going to be there. Now, I do think we’ll see a more diversified demand portfolio. And we will see on the supply side — where China’s dominating refined metal supply — there will be efforts made to again open up new avenues in that regard. But China is still going to be the most important factor for metals.

TNM: What are your thoughts on iron ore for 2022?

CH: It’s interesting. We’ve had this year well above US$200 a tonne. And then we’ve had the sharpest fall on repricing reversing. Which I mean, if you look at it, Chinese output went from plus 8% year on year to minus 20% year on year. As we get to March and April, the traditionally stronger demand season, I think Chinese steel output will be 10% to 15% higher sequentially than it is today. That means we don’t have to cut iron ore anymore. But I think we’re not going to hit the highs again. Let’s be absolutely clear on that. But I do think the price in the first quarter and in the first half of next year will be higher than we’re trading at today. I don’t have that outlook for many for many commodities I cover.

TNM: What are your other concerns as we move into 2022?

CH: The weather, especially La Nina [creating] a slightly cooler Pacific Ocean near the equator. What that does is it generally causes less helpful weather conditions, across a lot of key mining areas. It is cooler and wetter along the western seaboard of the Americas, is much wetter in northern Brazil, Australia.  I am building in higher disruption allowances for next year. I think there is greater supply risk out there. And it’s something as a supply risk that we haven’t talked about that much over 2021, because there’s so many other things going on. But I think supply risk is definitely making a comeback.  I wouldn’t be surprised to see lower output levels across copper in Chile and Peru, and in Australia and Canada, across iron ore in Brazil. Weather-related supply disruption is something that’s maybe coming out of left field.

TNM: Any final thoughts for investors?

CH: I think investors should always understand where we are in a wider cycle and understand some of the trends. I think there will be opportunities in these base metals and I think they will start to get more attention again. So be looking for opportunities to add to base metal positioning at some point in the new year.

This interview has been edited and condensed.