Scotiabank’s Mohr likes copper in 2012

Despite analysts facing some of the most difficult markets in years, Patricia Mohr, economics and commodity market specialist with the Bank of Nova Scotia (BNS-T, BNS-N), agreed to delve into the difficult job of predicting where  metal prices may be heading in the coming year.

“The outlook for base metals will be more mixed than in the first half of this year, as some will rally back strongly after retreating recently, and some may rally temporarily and then move down again,” she says. “It all depends on the fundamentals for a specific metal.”

Of the base metals, Mohr says copper has the best foundation.

“We see the most opportunity with copper, simply because it remains in supply side deficit,” she says.

And as if the markets were rising to support her claim, the metal rallied to US$3.54 per lb. in London on Dec. 1 – continuing an
upward trend from the doldrums of early October, when the metal traded for as low as US$3.08 per lb.

“It’s a little early to assume that we are necessarily through all of the negative impacts of the European financial difficulties, as there may yet be further disappointments,” she says. “But the price rally today came because of the coordinated central bank action.”

The coordinated action moved to cut the overnight swap rate by 50 basis points, in a bid to improve inter-bank liquidity and prevent contagion from eurozone credit tightening.

And while Mohr agrees that there was genuine inter-bank credit tightening, she doesn’t believe the situation is anything like what unravelled near the end of 2008.

Also bolstering her optimism for copper prices next year is the Chinese government’s willingness to increase liquidity in its economy.

The country implemented its first major easing in late November by reducing its banks’ required reserve ratio by 50 basis points.

Mohr says that while the reserve ratio sits at a rather high 21%, the move signals a reversal from the tightening policies it had pursued since 2010, which is a good sign for economic growth and base-metal prices.

“China won’t implement quantitative easing as in the U.S., but they will continue to reduce reserve requirements. With so many commercial banks state controlled, regulations on credit expansions on Chinese banks have an impact,” she says.

Mohr emphasizes that the Chinese government has a lot of financial tools that it can use to bolster their economy. Beyond selective easing methods that include reducing reserve requirements – as opposed to quantitative easing, which implies printing more money – Mohr says the government can use tax incentives, infrastructure spending programs and social housing financing.

“They will do what is necessary to bolster their economy, as they did in 2008,” she says.

There is a growing sentiment in the investment community, however, that suggests Chinese growth is not all it’s cracked up to be. The country is host to abandoned retail spaces and increasing mortgage defaults.

But Mohr isn’t buying in.

“I spend a lot of time in China, and I have a lot of faith in the determination that the Chinese have to keep their economy growing,” she says. “They did want things to slow down a bit because of rising inflation.”

The Chinese government pursued tighter policies when China Power Investment reached as high as 6.5%. But with inflation pulling back, it now has room to stimulate growth.

“I remain optimistic that China will continue to show at least reasonable economic growth, and that is fundamental to base metal prices,” she says.

Scotiabank Group estimates that gross domestic product (GDP) growth in China will come in at 8.9% for 2012, which is slightly down from this year’s 9.1% estimate. The country’s GDP growth in 2010 came in at 10.4%.

As for whether that downward trend points to the beginning of the end for metal’s secular bull-run prices, Mohr says that even in the business cycle’s later stages, copper prices have room to grow. 

“Copper could well run up to US$4 per lb. again,” she says. “I think strength in copper prices will be quite long-lived. It just has to do with the fact that the market is still in deficit. There are some new mines coming, but they are coming on stream very slowly.”

She points to ongoing strikes at Freeport-McMoRan Copper & Gold‘s (FCX-N) Grasberg mine in Indonesia and a recent strike at its Cerro Verde mine in Peru as examples of how work stoppages help keep copper prices firm.

Beyond copper, Mohr is also bullish on gold.

“Gold will continue to do well as the European Central Bank continues to buy bonds to bolster the financial system,” she says.

The ECB’s activity is a form of quantitive easing designed to increase liquidity in the economy, which in turn stokes fears of inflation and leads investors to view gold as the great hedge against inflation.

As for other metals, Mohr says that after a price drop late this year, iron ore prices seem to have firmed up to US$148 to US$151 per tonne.

“It looks as though iron ore has levelled off, and we think that prices will probably be steady where they are now,” she says.

As for nickel, Mohr points out that prices fell on account of reduced stainless steel production. Those prices could rally by early next year, she says, but she is not bullish on the metal over the year’s course because some large projects are scheduled to come on stream, and that should push down prices.

Mohr is also keeping her eye on potash. Unlike the base metals, potash prices are holding up well  in 2011’s closing months and edged up to US$502 per tonne in October. Indeed, potash prices are up 43% year-over-year. Mohr anticipates levelling off as major producers cap prices under global economic uncertainty.