“Zinc is to be the next big base metals play for investors,” said Scotiabank economist Pat Mohr Monday in the latest edition of the Scotiabank Commodity Price Index.
“A pick-up in China’s Flash Purchasing Managers’ Index for June to 50.8 from 49.4 in May and a broad-based improvement in U.S. industrial activity (+4.3% yr/yr, centered in autos, business equipment and materials) lifted market sentiment,” she observed.
“An improvement in The American Institute of Architects Bulling Index – a leading indicator of commercial & institutional construction – also point to a modest recovery ahead in zinc-intensive U.S. non-residential building activity,” Mohr added. “Equally important, market participants are anticipating a shift into ‘deficit’ in both refined metal and concentrate markets for zinc by mid-decade, given mine depletion and greenfield development which may not keep pace with demand.”
Meanwhile, the Scotiabank Metal and Mineral Index lost further ground in May, declining 2.4% and 15/7% below a year ago, Mohr advised. “Base metals rallied strongly, but were more than offset by softer precious metals and lower iron ore, uranium and sulphur prices.”
Potash prices (FOB Vancouver) were flat in May at US$302.50 per tonne, after bottoming in January at US$295,” said Mohr. “However, news that Uralkali will attempt to maximize revenue, rather than production, by seeking somewhat higher prices has lifted equity valuations for Western Canada’s potash producers. Global shipments are expected to pick up from 53 million tonnes in 2013 to 55-58 mt (million tonnes) in 2014, given strong deliveries to Brazil and the United States.”
In her analysis, Mohr noted that “international oil prices have been pushed up by the incursion of the ISIS (the Islamic State of Iraq and Northern Syria) into northern and Sunni-dominated central Iraq”.
“Since March, about 260,000 b/d of northern Iraqi oil exports have been lost due to the shutdown by insurgents of the Iraq-Turkey pipeline, which normally transfers Kirkuk blend through to Ceyhan,” she said. “However, if the militants push further east into Kurdistan, another 500,000 b/d could be lost; some of this output has probably already been disrupted by militant fighting over Iraq’s largest oil refinery (310,000 b/d at Baji), which runs on Kirkuk crude.”
“A successful move into Shiite-dominated southern Iraq – the source of most of Iraq’s oil production (around 2.6 mb/d in May 2014) seems unlikely,” she noted, “exports from the south so far have not been affected.”
“However, the timing and extent of planned huge investments by foreign oil majors in Iraq’s oil fields will be delayed and likely reduced. Iraq has the world’s fifth-biggest proven oil reserves at 140.3 trillion barrels behind Venezuela (297.3), Saudi Arabia (265.9), Canada (173.2) and Iran (157.3) and, under optimistic assumptions, might have produced as much as 8 mb/d by 2017.”
“Geopolitical supply risks in Iraq come at a time of ongoing Libyan outages due to civil unrest and disappointing progress in developing the Kashagan oil field in Kazakhstan,” Mohr observed, “While export disruption from Iraq has so far been limited, trades have bid up oil prices, recognizing the ‘risk’ to world oil supplies.”
“In a worst-case scenario, Saudi Arabia could offset the loss of all Iraqi exports, with current Saudi output at 9.75 mb/d well below its maximum capability of 12.4 mb/d,” she added. “However, supply conditions in most OPEC countries are surprisingly tight, with most oil fields operating over 95% of capability.”
“The net result, the Brent oil price forecast has been revised up moderately to an average of US$111 per barrel in 2014 and US$112 in 2015 and WTI oil to US$102 in 2014 and US$103 in 2015, with positive implications for Canada’s oil patch,” Mohr concluded.