Dec '14/Jan '15

Commodity spotlight 2015

We take a look at 30 different metals and minerals, reviewing the past year – the growing trends, the unforeseen events – and exploring what is on the horizon

Chris Balcom, Correy Baldwin, Ryan Bergen, Ian Ewing, Graham Lanktree, Christopher Pollon, Kelsey Rolfe

Coming on strong

Hudbay's Lalor mine
Hudbay’s Lalor zinc, gold and copper mine is 210 kilometres east of Flin Flon Manitoba | Courtesy of HudBay

The world’s largest zinc mines are closing and it is hard to underestimate the impact this will have on prices for the base metal.

The third quarter of 2015 will see Australia’s huge Century zinc mine end production after putting out more than 455,000 tonnes this year and 488,233 tonnes in 2013.

Last year Glencore wound down production at the Brunswick and Perseverance mines in Canada, taking a large share of supply with them too. “That’s the major driver why we see zinc prices moving a lot higher in the years to come,” says Mike Dragosits, senior commodity strategist at TD Securities, citing the fizzling out of other large mines in Ireland (Vedanta) and Peru.

At current rates, some analysts expect 14 per cent of zinc concentrate production to evaporate before 2016. Despite production increasing in India, Mexico, and China, these projects are churning out lower grades at smaller mines.

“We’re forecasting a deficit in the market over the next few years,” said Dragosits. “The anticipation of those much larger deficits in the years to come is going to move the market ahead of fundamentals a little bit,” says Dragosits. Throughout 2015, he adds, zinc will trend upwards, hitting highs just before 2016. Annual average forecast prices in 2015 sit at US$2,480 per tonne with a year-end quarterly average of US$2,513 per tonne.

Lalor mine opening ceremonies
The opening ceremonies at HudBay’s Lalor mine | Courtesy of HudBay

Zinc is currently listed around US$2,220 per tonne, with a more muted outlook in the next couple of months. Despite growth in the U.S. economy, Dragosits says, the market right now is overshadowed by the economic slowdown in both China and Europe.

“China is undergoing a slowing regime kicked off by government officials positioning to put the economy on a betterquality growth track,” he says. Officials have tamped down on the property market, which will impact prices over the next few months, he adds. Dragosits’s view is that China will eventually stabilize and return to drive demand for base metals like zinc, which is used in nuclear reactors, steel, rubber and the manufacture of sunscreens and dietary supplements, as well as to preserve lumber for construction and galvanize iron.

In Europe, investors are waiting to see if the European Central Bank’s one-trillion-euro stimulus in the sluggish eurozone will shock the economy back to life. “We don’t expect spectacular growth there, but aside from near-term weakness, we see some stability in the European economies,” Dragosits says. These factors, and better growth in the U.S. in the coming years, will drive zinc demand.

Canada produces roughly 5.4 per cent of the world’s total supply of refined zinc. The country’s newest contributors are Glencore’s Bracemac-McLeod mine in Quebec, which began production in 2013, and HudBay Minerals’ Lalor mine in Manitoba, where mine construction was completed this year. In anticipation of higher prices, Canadian firms are exploring for the metal throughout the country, with a few promising results.

– Graham Lanktree

Fertility issues

It has been an eventful year for potash. The market was in turmoil for much of 2014 – the result of Russian-based Uralkali’s withdrawal from the Belarus-led cartel BPC – but today prices are up and demand has reached new heights. Paul Burnside, Potash Consultant at the CRU Group, explains that although underlying consumption is good, the surge in demand can be deceptive.

“The second half of 2013 was very weak on demand because of so much uncertainty over pricing, and people preferred to draw down inventories,” says Burnside. When buyers did come back, demand was strong, but this included a lot of restocking. Actual consumption, he warns, “has responded to lower prices but is not as strong as apparent demand would indicate.” The European and North American markets are both mature, while China and India have not met expectations in recent years. The standout performer is Brazil, which is almost entirely importdependent. It is also a major producer of sugar cane and is opening up large amounts of agricultural land with poorer soil, both activities requiring heavy application of fertilizer.

A lot of new capacity is coming online. Much of this is in Canada, with PotashCorp being the most aggressive, including its newly commissioned Picadilly project in New Brunswick. “There’s been a lot of investment in building capacity, and now this new capacity is coming on stream, but the industry’s approach to pricing hasn’t promoted demand growth,” says Burnside. Consumption, he says, now must increase steadily if the market is going to absorb this new capacity.

The key to curbing overproduction will be industry discipline, notes Burnside. However, the recent brine inflow that has halted production at Uralkali’s Solikamsk-2 mine will also play a role. The mine accounts for 2.8 per cent of global capacity, and it is uncertain whether the mine will have to be abandoned. While producers in North America, with their new capacity, could easily replace what has been lost, Burnside says, “Uralkali’s prognosis is likely to influence forthcoming price negotiations with China and other buyers.”

– Correy Baldwin

The difference one year makes

Gill Winckler can be excused for looking a little shell-shocked standing at the podium, telling the story of what has happened to her thermal coal mine in the year since she last spoke at the Coal Association of Canada’s annual conference.

In 2013 the president and CEO of Coalspur Mines was busy preparing to build the company’s Vista thermal coal mine in Alberta – a project that was fully engineered, had most of its permits, and was already planning to construct a first-phase, six million tonne-per-year plant. The company had also secured about $350 million of the $500 million project cost.

In September 2013, it was widely believed that the Newcastle thermal coal spot price of US$77 per tonne (US$/t) was at the bottom, having dropped 11 per cent from the year before, in turn 28 per cent off of prices the year before that. “It went south instead, and today the spot price is US$66/t,” said Winckler. “Not only is the price down, but the expectations have gone down for a few years.”

This downturn in thermal coal has occurred in lockstep with metallurgical coal – a situation where prices continue to creep downwards in response to a glut. “It’s just a terrible time for oversupply in thermal coal,” lamented Wood Mackenzie coal price analyst Joe Aldina, who pointed to Indonesia as a large contributor to the thermal coal oversupply. Wood Mackenzie predicts the oversupply situation will persist through 2020, although prices will rise in 2015.

So what is a company like Coalspur to do? Winckler has focused the company on adding value to the asset by creating certainty around construction costs and making mine design improvements. An ongoing strategic review is considering various options: looking to recapitalize, maybe a joint venture, or selling the asset outright.

“We’ve got a project that is ready to go,” concluded Winckler. “It’s different from last year, but we know Vista will be built.”

– Christopher Pollon

Next: Salt, Tin, Tungsten, Cadmium, Talc, Magnesium, Titanium and Aluminum

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