October 2014

Channelling the future

Economist Patricia Mohr says a copper price rebound will take years but zinc is heating up

By Virginia Heffernan

Patricia Mohr, vice-president of economics and commodity market specialist at Scotiabank in Toronto, is known for her precision in predicting commodity prices. She is responsible for developing the Scotiabank Commodity Price Index, the first index designed to measure price trends for Canadian commodities in export markets. In 2013 she won the Metal Bulletin Apex Award for the most accurate gold and precious metal price forecasts of 2012. In mid-September, Mohr shared her views on the markets with CIM Magazine. She expects copper prices to remain stable or drop slightly over the next couple of years, with zinc taking its place as the base metal market darling.

CIM: What is driving the copper price this year?

Mohr: Although copper prices are down from the record high in 2011 (US$4.65/lb), they remain quite profitable. I think we are beginning to get a cyclical lift-off in base metal prices, but copper is not going to be in the group that rallies in the next 18 months because there is still a lot of new mine supply coming on stream. At US$3.15 per pound, prices remain lucrative for most copper mining companies, yielding an average profit margin of 28 per cent over full break-even costs, including depreciation and interest on debt.

CIM: What can we expect on the supply side for the rest of 2014 and into 2015?

Mohr: There is another wave of mine supply that is about to come on stream including three new mines in Chile (Mina Ministro Hales, Caserones and Sierra Gorda), two in Peru (Toromocho and Las Bambas), one in B.C. (Red Chris), and a big mine in Zambia (Sentinel). There is a lot of new supply coming from both Zambia and the Congo, including greenfield projects and the ramping up of brownfield mines. There is a fair amount of brownfield expansion in the United States, and KGHM International plans to re-start the Afton Ajax mine in B.C. around 2019, so all in all, there is quite a lot of new supply coming our way.

CIM: What about demand?

Mohr: The demand for copper remains quite robust in China with consumption boosted by strong auto production and investments in high-speed rail and social housing. Despite all the negative sentiment about China’s economy, the reality is that they are still likely to get GDP growth of about 7.4 per cent this year. Yes, there is a correction in private sector residential construction, but China is offsetting that by expanding social housing – mostly apartment buildings – a big initiative that rarely gets discussed. In urban areas, the Chinese are tearing down whole shantytowns and replacing them with new housing and they are building new subways and rail lines. All of this activity is very copper intensive. Copper consumption in China will slow from 12 per cent growth last year, but it will still be more than 8.5 per cent.

CIM: How much of global copper production is consumed in China?

Mohr: China accounts for 46 per cent of world consumption of refined copper and that number is increasing slowly. By 2017, its share should be up to 47 per cent because it controls so much of the world’s manufacturing capability. In Europe, economic growth has been disappointing and even reversed in the second quarter. The United States is picking up steam and industrial activity is performing quite well there, but because of the economic shift that occurred over the past decade, the real demand driver remains China.

CIM: What direction are copper inventories moving?

Mohr: Inventories for refined copper are down about 50 per cent on the LME, COMEX and Shanghai Futures Exchange since late-2013. Demand growth is solid and there is a shortage of copper scrap around the world, so fabricators have had to shift to copper cathode. The prices have not been high enough to encourage a lot of scrap to come into the market.

CIM: Labour disruptions have affected copper supply in the past. Do they continue to be a factor?

Mohr: There haven’t been any major labour disruptions recently, but the Indonesian ban on the export of unprocessed minerals caused Freeport McMoRan and Newmont to suspend operations at the Grasberg and Batu Hijau mines respectively for a number of months. The Grasberg mine is operating again because Freeport reached a memorandum of understanding with the Indonesian government in July – under which an amended contract of work will be negotiated over the next six months – allowing the company to export concentrates at a reduced export tax rate, though with higher royalties on copper and gold. Newmont is also working on an agreement, and I would expect it to receive a similar package. However, the Indonesians are quite serious about increasing processing in their country and the export duties are tied to smelter development in Indonesia.

CIM: Are there other factors affecting the copper price?

Mohr: General market sentiment on the economic outlook for China and global GDP growth are both very important in determining prices. The strength or weakness of the U.S. dollar is also important. Unfortunately, we expect a strengthening of the U.S. dollar in the next 18 months – not usually a positive for dollar-denominated commodity prices.

CIM: What are your copper price forecasts for 2014, 2015 and the longer term?

Mohr: I’m calling for prices to average US$3.16 per pound this year and to move to a US$3 per pound average next year. In terms of market interest, the baton will shift from copper to zinc in the next couple of years, and I expect very good performance from zinc. Later in the decade, I think copper prices are going to move back up resoundingly, but that will take a while. There is still a lot of new mine supply coming on stream that the market will need to absorb.


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