Metals Outlook 2012

 Iron Ore

Iron ore is now one of Australia’s top earners, and despite global economic uncertainty its good fortunes look set to continue.

But while the fundamentals of the market are sound, analysts are mixed over just how well the commodity will perform in 2012.

Fat Prophets resources analyst David Lennox told Australian Mining that although the iron ore price would go well next year it would not reach the same heights it had in 2011.

“We haven’t put a figure on it but we expect the price to move higher in 2012,” he explained.

According to IBISWorld, the industry will generate revenues of approximately $56.6 billion, growing by an additional 10.2% for the year, with overall profits of $25.6 billion.

Lennox said like most commodities, the strength of iron ore next year would be tied to the performance of the Chinese economy.

But the latest figures from the industrial powerhouse have not been as kind to the industry as they have been in the past.

Recent spot market prices for iron ore have been on the slide, and Chinese steel mills have attempted to renegotiate their contracts to reflect these falls.

BIS Shrapnel’s Adrian Hart said it was unclear whether these drops were indicative of a wider slowdown in the market.

“There is uncertainty here on whether it’s a broader trend or simply part of a cycle as China runs up its stocks,” he said.

“But miners are not too concerned over the price drop as the commodity is still at historical highs, and we are unlikely to see much of a let up in the sector as BHP, Rio Tinto, and Fortescue Metals Group all move ahead with their expansions.”

Industry performance will expand, but at a slower rate over the next five years through to 2016-17, as higher production levels offset the lower prices.

IBISWorld believe production will reach about 470 million tonnes in 2011-12, and exports to be around 435 million tonnes.

But worrying statistics from China don’t stop at the spot price market.

The announcement of China’s third quarter GDP rise of 9.1 per cent, while still impressive, was lower than expected.

According to Westpac chief economist Bill Evans China’s housing boom has also slowed, and there is evidence to suggest the country is stockpiling ore.

Evans told a business conference in Perth earlier this year he expected both factors to dampen the iron ore price for next year.

But Lennox put the fall in China’s housing market down to the onset of winter, and said Fat Prophets expected demand to pick-up once again next year.

“We attribute the recent falls on the spot market to a seasonal flow,” he said.

“It’s currently moving into winter in China and so construction is starting to slow.”

“Once winter is over we expect building in China to pick up and we’ll see a rise in ore prices again.”

Foster Stockbroking senior analyst Craig Brown also told Australian Mining while next year’s iron ore outlook was positive, prices would not perform as well as in 2011.

“It’s looking like it might be oversupplied in some areas,” he said.

“But prices are still quite high and will be trading around $140 over the medium term.”

Last year the average spot price for iron ore levelled at around $US135.

Despite the relatively strong outlook the market looks set tighten next year as the main players compete for a larger market share.

Brazil’s largest iron ore miner, Vale, has already indicated it is willing to sell at a ten per cent discount to undercut Australian miners.

The game for 2012 looks set to be a tight one.

 

Gold

Gold has been the star of the metals stable, as global uncertainty drives investment into the metal and pushes prices consistently upwards.

Investors have rushed to gold as fluid markets, particularly in Europe, makes the stock market generally shaky.

While the price of gold per ounce struggled to move past US$1400 during the first three months of 2011, it began to rise rapidly from March onwards, spiking in September and reaching new heights of nearly US$1900 per ounce, essentially having tripled in price since 2007.

However, is it likely to stay at these record highs into 2012?

Its continual rise since the global financial crisis has “pushed gold to the level where some are essentially extracting teeth to supply” BIS Shrapnel senior economist Adrian Hart told Australian Mining.

Speaking to Foster Stockbroking senior analyst Craig Brown, he told Australian Mining continued financial uncertainty in Europe is likely to push the commodity northwards, Brown saying “it could definitely go higher, it’s a safe haven, everyone knows Europe is in a lot of trouble, and in terms of this gold will remain strong and if the problems in Greece continue it may even hit levels of around US$1900 again, but it will probably be closer to the US$1700 mark.

“But post crisis we may see the price start to come down,” Brown added.

He went on to say that although gold has a good future, it may level out again for 2012, stabilising at around $US1500, and potentially dropping down to US$1100 per ounce in the longer term.

Hart agreed, saying “global volatility will see the price push upwards, but it will likely fall in three to five years from now, although it will remain at a high level”.

David Lennox, the senior resource analyst for Fat Prophets was more positive for gold futures.

“We expect it will be breaching the US$2000 an ounce level in 2012,” he told Australian Mining.

Lennox added that there will be further upward price pressures due to US debt.

“The markets will probably turn to focus on the US debt situation, especially if growth stalls, as it looks to under recent Federal Reserve forecasts.”

According to IBISWorld reports, the value of gold exports is predicted to be around $13.2 billion in 2011-12, with gold production to increase over the five years through to 2016-17, as new mines commence operations.

However, Hart believes the major issue facing the industry “is that there are not enough large potential deposits, such as the Super Pit or Tropicana, to take full advantage of this boom”.

Industry revenues are expected to expand at an annual rate of around 4.5 per cent over the next five years, reaching $16.9 billion in 2016-17.

 

Copper

Copper is often viewed as a barometer for the global economy.

Despite serious market volatility in the wake of the European economic crisis, demand is unlikely to abate.

According to BIS Shrapnel senior economist Adrian Hart, there are low stocks of the metal available globally “so we don’t expect the price to deteriorate, and it will begin to rise again, particularly on the back of the projected LNG infrastructure boom”.

Fat Prophets analyst David Lennox agreed.

“Copper is definitely in supply constraint conditions, and that will support higher prices, certainly above US$4 per pound.”

Part of this is due to a number of projects being mooted due to the global financial crisis or slowing down significantly in the wake of the Queensland floods, however in Australia projects such as Olympic Dam will steadily increase volumes to the middle of the decade as economic growth pushes upwards again.

OZ Minerals’ Prominent Hill mine and Xstrata North Queensland Copper operations will also add to these levels.

Processing will be hit though, as Xstrata shuts down all its copper refining operations in Australia by 2016.

“But there is a bright future for the metal, with demand sure to remain robust,” Hart stated.

Speaking to Thundelarra Exploration managing director Brett Lambert, he said “there will always be a strong demand for it for infrastructure, and long term it will be the most robust in terms of metals”.

IBISWorld analysis reports point to continued growth in China and India as the main driver for demand.

“Revenue is estimated to grow by about 18.7 per cent in 2011-12, reflecting higher prices,” it stated.

However, this is expected to slow in 2012-12 to 17.9 per cent, dropping dramatically in growth rates to only 4.9 per cent in 2013-14, and then declining in revenues by 2015-16.

The copper industry is predicted to create generate around $8.46 billion in 2011-12, as compared to the previous boom heights of 2006-7 when it generated $6.41 billion.

By 2016-17, IBISWorld believes that copper industry revenues will grow to $10.92 billion, with copper prices to hit about US$10 039 per tonne in 2011-12.

 

Nickel

“Nickel has always been a volatile commodity and it is hard to predict where it will end up.”

This is according to Thundelerra Exploration’s Brett Lambert.

The global financial crisis saw a serious output drop, as a number of mines, such as BHP Billiton’s Ravensthorpe nickel operation, closed due to a huge slump in prices.

Output is now expected to rise and actually exceed pre-global financial crisis levels, reaching 197 000 tonnes in 2011-12, IBISWorld believes.

Part of this is due to its close ties to the steel industry, which will grow as the demand for infrastructure support increases up until 2016, on the back of the booming LNG industry.

Much higher prices will drive revenues by nearly 22 per cent to $3.58 billion, a massive turn around after nearly halving in 2008-09.

However, the actual price itself “is not expected to advance much next year, although it will pick up in the decade, but currently there is not enough investment in the metal globally,” Adrian Hart, a BIS Shrapnel economist, told Australian Mining.

Although the recent re-commissioning of Ravensthorpe by First Quantum may change this significantly, as the mine has 263 million tonnes of proven reserves.

“This depends on whether it can increase production on time, as if the mine comes on later in the forecast, it will cause higher stocks and weaker prices.”

IBISWorld predicts industry revenues are unlikely to again reach the 2006-07 highs of $7.115 billion, at best reaching $4.46 billion in 2013-14.

However industry performance overall is expected to improve through the five years to 2016-17 according to IBISWorld, with revenues rising an average annual rate of 1.3% and output levels expected to increase to the point where it offsets the negative effects on revenue caused by a lower Australian dollar nickel price.

 

Silver/Zinc/Lead

While usually playing second fiddle to gold, silver was big news in 2011.

In the first months of the year speculation on the commodity was rife and its price jumped over 60 per cent.

But while prices eventually normalised next year’s outlook remains positive.

Traditionally silver’s fortunes have been closely tied to gold, and Brown told Australian Mining he expected this relationship to continue in 2012.

“Historically there has been a pretty good correlation between gold and silver prices,” he said.

“Usually investors move to silver in the event they can’t afford gold.”

Brown said there was no reason for speculation to send the silver price rocketing again in 2012.

“In our view prices will reach around $30 and fall down to around $25 in the longer term,” he said.

“Post 2015 the price will probably weaken further to around $20.”

Lennox’s outlook was broadly similar to Brown’s, but he said the commodity had some negative exposure to changes in the US currency.

“If the US dollar weakens silver will move weaker too,” he said.

Lennox said there had been mixed messages from the US economy and its return to positive performance.

“We’re currently lineball as to US growth, holding the view that it will be risk to the upside,” he said.

Lennox also said the view on silver from the industrial side was not impressive.

“There is a bit of a subdued outlook on the industrial side of silver exposure,” he said.

 But for the less talked about commodities – zinc and lead, the outlook is mixed.

Unlike markets such as gold and iron ore, demand for zinc and lead is not sky-high, as the industry generated only $6.59 billion in revenues for 2011-12, as compared to $7.87 billion in 2006-07 – an average yearly fall of 3.5 per cent, according to IBISWorld.

However, this was caused by extremely high zinc prices in 2006-07.

Nevertheless China continues to drive development in these markets, and analysts see the potential for growth in the future, with Australia’s output of the metals estimated at 1.55 million tonnes for zinc, 664 000 tonnes for lead, and 59.5 million troy ounces for silver.

Lennox told Australian Mining while there had been a subdued market for zinc over the past few years; its outlook seemed to be moving positively.

“There has been an oversupply situation with zinc for some years, but we do think that situation is starting to go into the other side of the equation,” he said.

He said while a turnaround would not be immediate, demand for zinc looked to be on the rise and a continuing strengthening of the global economy would help drive its recovery.

“The oversupply situation is starting to be taken out by demand.”

Lennox said the real movements in the sector would come in the years beyond 2012.

“Looking even further into the future, 2013 will be a supply constrained position for zinc and that will support the price well above where it is now,” he said.

South Australian zinc miner Terramin told Australian Mining it was generally upbeat about the commodity’s future.

But its commercial analyst Matthew Blatchford said global debt turmoil had played a part in dampening zinc’s outlook.

“Fundamentally zinc is strong but the financial instability in Europe which is driving much volatility in all base metal prices, not just zinc, is overshadowing the positive fundamentals,” he said.

Like Lennox, Blatchford said zinc prices would pick up again over the next few years.

“We believe that the zinc market is moving towards a deficit in the next one to two years,” he said.

Blatchford explained that one of the key indicators for the market, Chinese demand, looked to be providing support for the price.

“Chinese galvanised steel production, a strong indicator of zinc demand, is running at record levels and looks set to continue,” he said.

But as with other base metals this outlook is underpinned by the assumption that leaders in Europe can move toward stabilising the debt crisis.

Blatchford said analysts would be watching carefully as the situation in Europe unfolded.

“The immediate focus will be on Europe and the state of the global economy – this will dictate short term zinc prices and the speed at which a recovery will take place,” he said.

 

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