Gold prices to stay high, but investors to shift to equities, industrial commodities

Scotiabank's Patricia Mohr advises that copper prices have surged to genuinely profitable levels, although zinc and nickel prices still remain below average break-even costs.

RENO, NV - 

While gold prices are expected to stay high this year, Scotiabank economist Patricia Mohr predicts that "investor interest is likely to gradually shift first to equities and then to industrial commodities in the next several years."

Mohr also noted that LME copper prices have surged to "genuinely profitable levels" of US$2.16 per pond on April 16, yielding an average 37% profit over average global break-even copper production costs.

Purchases by China's State Reserve Bureau, tight global scrap supplies and higher prices on the Shanghai Futures Exchange than on the LME have boosted China's imports, Mohr said. Meanwhile copper stocks on the Shanghai Exchange remain "quite low."

Mohr advised that zinc and nickel prices have "also rallied in sympathy with copper and on news of the China's industrial activity. However, prices remain below average break-even costs."  In the meantime, Mohr said "spot uranium prices also appear to have bottomed, edging up from US$40 per pound to US$42 in late April."

Meanwhile spot potash prices are still lucrative, although Mohr believes they could "retreat moderately further in coming months-with farms cutting potash application in favour of less expensive nitrogen fertilizers-significant mine production curtailments by major producers in Canada, Belarus, Russia and Israel with will likely return global inventories to more normal levels by mid-year, pointing to a price turnaround in late 2009."

In her analysis, Mohr discovered that with the global recession cutting grain-fed meat consumption and high global wheat costs, the U.S. Department of Agriculture expects farmers to reduce their planting of corn, soybeans and wheat by 2.3% this year. "The under-application of fertilizers should be significant," she noted.

Meanwhile, major potash producers have cut world production by 12 million tonnes or 21% of effective capacity to bring supplies down in line with lower demand. For instance, Canadian output has been cut by 5.7 million tonnes. "As a result, global stocks should return to normal levels by the end of 2009:Q2, suggesting a pickup in sales volumes by October," Mohr forecast. "In addition, a severe under-application of fertilizers (especially potash and phosphates) may cut global grain & oilseed yields in 2009-10, setting the stage for significantly higher nutrient application and prices in 2010."

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