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While Scotia Capital commodity expert Patricia Mohr believes that base metal prices are likely to go lower over the course of the next two years, the following five should prove interesting.
GEOFF CANDY: Hello and welcome to this Mineweb.com Newsmaker podcast. Joining me live at the PADC 2013 is Patricia Mohr – she’s the vice president of economics and commodity market specialist at Scotia Capital. Patricia there's been a lot of talk over the last few months, well indeed over the last few years about the rise of China, the impact of China on the supercycle. More recently there's been a lot of talk about whether or not the supercycle is coming to an end. There does seem to be a divide – some people saying it is at an end, others saying that this is just a pause or almost a palate cleanser between courses. What is your view, where are we placed in the current cycle?
PATRICIA MOHR: Well I think in the next few years probably we’re going to see a little bit of a slowdown in global exploration activity and of course the junior mining sector is having difficulty getting equity finance at the moment. I think we’re at a point where some new mine capability either has come on stream in the case of commodities such as nickel or is about to come on stream which I think is the case for copper and so probably we’re going to have a number of years – I’m really talking about two years when market prices are a little bit lower than they have been in the past five years.
Now of course it’s been quite a volatile situation with the great recession in the second half of 2008 and then followed by the downturn that started last year around spring due to global concerns over the euro zone sovereign debt challenges. But I think there will be a little more mine supply coming on stream globally in 2013 and particularly in 2014. So, the prices are going to move a little lower.
Now I quickly would add that, right at the moment, we are not in a recession, anywhere near recession. Prices for most base metals, precious metals for Canadian mining companies are still at profitable levels in almost all cases, though for aluminium producers in certain parts of the world prices have been flirting with average cash costs. But I think the second half of the decade I would see actually a return of the Bull Run in mining with a lot of metal prices re-escalating again and copper continuing to do quite well. Now I do think prices are going to move down in the next couple of years, but I think second half of the decade we might still see copper prices average $3.50 a pound which of course is historically quite a high level for copper and I think nickel will move dramatically higher in the second half of the decade and zinc, also for supply reasons.
So China which has been the big growth story and leader in the mining sector, I think at the moment they're much more comfortable with somewhat slower growth than the market has been used to in the past five years, when it was growing at around 10% per annum. They're more comfortable with 7.5% to 8% growth and of course their potential for GDP expansion is slowing a little, but of course off a very high base. So they're more comfortable with somewhat slower growth than they used to have, but we still remain optimistic about China. We think their GDP will expand 8% this year and probably another 8% next year. Of course it was 7.8% in 2012. They did have a soft landing for their economy but of course they gave everyone a bit of a scare in the middle of the year as things slowed down fairly dramatically with a correction in consumer goods manufacturing but things have picked up again in China and remain fairly buoyant.
GEOFF CANDY: If we assume that China is moving more into a middle income economy with more people in the middle class, and as urbanisation continues, is the type of commodity demand likely to change as we see more white goods perhaps and less steel for example. Does that change the make-up or the mix of the commodities demanded?
PATRICIA MOHR: Well I think the base metals, the demand for copper - of course we use a lot of copper, also aluminium in white goods and that will remain quite strong. The expansion in the steel sector in China, there has been tremendous expansion of course with China’s steel industry counting for probably over 45% of world carbon steel production now. It’s probably going to slow a little in the next five years. I think the steel companies in China, and elsewhere for that matter, the profit margins have been quite slim so it could be that they're going to put more emphasis on their profitability. There is a lot of iron ore that is potentially coming on stream in places like West Africa, to a lesser extent in Brazil and possibly in West Africa and in Canada. So instead of those enormously record prices for iron ore, we’re probably going to see a bit of a tail off in iron ore prices in the next five years. And so it will be a somewhat more challenging market for mining companies in that sector.
GEOFF CANDY: If we look briefly at two particular metals, uranium and copper, if we look at uranium first we’re seeing prices in and around the $40/lb range. How do you see that market unfolding post Fukushima now and perhaps relooking at some of the nuclear power needs?
PATRICIA MOHR: Well of course with the market one of the reasons why prices moved down in the second half of last year and remain at a low ebb in early 2013 was the fact that Japan which shut virtually its entire reactor fleet down, they’ve only re-started two out of about 50 operable reactors and so the market is waiting for Japan to restart more of its reactors. Japan of course has a large inventory of uranium which they haven’t been using. They haven’t been selling it either – I think they're quite happy just to hold the uranium. But the market really is waiting for signs that more reactors will be restarted in Japan. However, there are some positives which have occurred. Last October China announced a new target for its reactor capability and they’ll be building more than 50MW worth – I believe its 54MW of nuclear energy capability by the end of this decade. It’s not quite as big a target as they had prior to Fukushima but it remains very, very large. And India, Russia, the UAE, they're all going ahead in many cases with very ambitious nuclear energy targets. And of course nuclear energy for base load demand in areas where you need large volumes of electricity is probably the way to go. Operating costs very low once you get the reactors in place, although of course capital costs are also very high in many cases but it is very economical once you’ve got the capability in place. And nuclear power emits virtually no greenhouse gasses, so it is very environmentally friendly and there's nothing else even close to nuclear power except for hydro – hydro-electricity and of course in many areas of the world, hydro is already more or less fully developed. So the end of 2013 the HEU (highly-enriched uranium) agreement between the United States and Russia comes to an end and I believe that that means that as far as western markets go it’s going to be at a loss of about 24m pounds of uranium that Yellow Cake and that probably as we approach that milestone it’s probably going to lead to improving sentiment for uranium, and I would estimate that in 2014 we’re going to see somewhat stronger prices and we hope that the price is going to go back up to the $60 mark around 2016.
GEOFF CANDY: And finally in terms of copper, you mentioned earlier the $3/lb level, how much of that has to do with new mine supply coming on stream? We saw prices spike when there was a concern in 2011 of imminent supply constraints. That clearly didn’t happen, there was a lot of talk around the stockpiles in China - how do you see the supply side unfolding over the course of the next few years?
PATRICIA MOHR: I think in 2013, 2014 we are going to see more new mine and really largely from brownfield projects for copper come on stream. But I think in the second half of the decade with further growth in the market, mining company and very disciplined approach now because of the more challenging equity markets, a lot of mining companies are going to be very disciplined about their capital spending in the next few years requiring higher rates of return for shareholders and of course also in view of the fact that both operating and capital costs have escalated markedly, I do think second half of the decade will be a good period for copper and many others of the base metals and the prices are going to have to move higher again really to justify new mine development.
GEOFF CANDY: And very quickly there does seem to be a shift perhaps towards more conservatism from a management point of view - shareholders demanding better capital management, greater dividends and those kinds of things. We’re seeing probably en entirely new set of management teams coming into play, particularly in the diversified miners over the next few months. Is that likely to change the way in which new mines are being built and perhaps the scale of new mines being built and perhaps a focus much more on the projects already under way. And what does that do to the supply side of things?
PATRICIA MOHR: Well I think mining companies generally are going to be much more disciplined about their capital allocation and of course there has been a lot of new mine development deferral just recently. Mines with very high capital costs by some of the major mining companies, and it’s not because they don’t really have ample cash flow. They do have the cash flows. Senior mining companies in Canada have quite ample cash flow, but it’s because shareholders are demanding a better return. So they are going to be much more disciplined about the allocation of their capital and I think that in part is going to set the stage in some metals for stronger prices in the second half of the decade. And of course we saw this back in 2007 – around 2006-2007 where some of the major mining companies didn’t think copper prices were going to be particularly high or just to justify new mine development. Well of course they set the stage by not going through with projects for very strong market conditions in recent years.
GEOFF CANDY: What then does this all mean for things like M&A, how does this place the market going forward?
PATRICIA MOHR: Well we think that M&A activity is actually going to increase in the next few years and one of the reasons is that the major mining companies and senior mining companies are probably going to divest themselves of assets that are not core, and to really focus on particular metals and sectors where they really want to be bigger and longer term players. And so it’s going to really set the stage for other companies to pick up some assets that they might actually find attractive.
GEOFF CANDY: It’s interesting because one does get the sense that we are seeing perhaps a slight inflection point for the diversifieds where they are choosing horses for the next leg of the race, if you will. Does that mean you're likely to see fewer major diversified companies and perhaps a more narrow focus?
PATRICIA MOHR: I think there will be a more narrow focus really on sectors where they have assets that are really low cost and where they really have expertise letting go assets that they're less interested in.
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