Outlook 2012: Patricia Mohr likes copper

Despite analysts facing some of the most difficult markets in years, Patricia Mohr, economics and commodity market specialist with Bank of Nova Scotia, agreed to delve into the difficult job of trying to predict where the prices of some key metals 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 fundamentals

“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 yesterday’s coordinated central bank action.”

That coordinated action was a move to cut the overnight swap rate by 50 basis in a bid to improve inter-bank liquidity and prevent contagion from Euro zone credit tightening.

And while Mohr agrees that there was genuine inter-bank tightening of credit she doesn’t believe the situation is anything like what unraveled in the fall of 2008.

Also bolstering her optimism for copper prices next year is an increased willingness on the part of the Chinese government to increase liquidity in its economy.

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

Mohr says that while the reserve ratio still sits at a rather high 21%, the move signals a reversal of the tightening policies it had been pursuing since 2010, and as such is a good sign for economic growth and hence base metal prices.

“China won’t implement Quantitative Easing (QE) 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 such as reducing reserve requirements (as opposed to quantitative easing which implies the printing of 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 however, a growing sentiment in the investment community which says that Chinese growth may not be all its been cracked up to be and points to abandoned shopping malls in parts of the country and increasing mortgage defaults as evidence.

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.”

With the CPI reaching as high as 6.5% the Chinese government pursued tightening policies, but with inflation pulling back more recently it now has the room to stimulate growth.

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

Scotiabank Group estimates that GDP growth in China will come in at 8.9% for 2012, slightly down from its estimate for this year of 9.1%. Back in 2010 GDP growth in the country came in at 10.4%.

As for whether that downward trend points to the beginning of the end of the secular bull run in metal prices, Mohr says that while we are getting later into the business cycle, copper prices still have room to grow.

“Copper could well run up to US$4.00 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’ a Freeport McMoRan‘s (FCX-N) giant Grasberg mine in Indonesia and a recent strike at its Cerro Verde mine in Peru as examples of how work stoppages help to keep copper prices firm.

Beyond copper, Mohr is also bullish on gold.

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

Such activity from the ECB is a form of QE, and is designed to increase liquidity in the economy, which in turn stokes fears of inflation and leads investors to hold gold as the great hedge against such inflation.

As for other metals, Mohr says that after a drop in price through the fall, iron ore prices seemed to have firmed up in the US$148 to US$151 per tonne level.

“It looks as though iron ore has leveled 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 recently due to reduced stainless steel production. Those prices could rally, however, some next spring she says, but even still she is not bullish on the metal over the year as a whole 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 held up well through the fall, actually edging up to US$502 per tonne in October. Indeed potash prices are up 43% year over year. Mohr, however, thinks prices will now level off as the major producers cap prices due to the current state of global economic uncertainty.