Editor's note: Originally published on August 28, 2014
Patricia Mohr is Scotiabank’s Vice President of Economics and Commodity Market Specialist who, in 2012, won the Metal Bulletin Apex award for the top gold and overall precious metals price forecasts when she was 99.63% accurate in her call on the price of the yellow metal that year.
Yesterday, she published a succinct report noting that a cyclical recovery in base metals was underway and that zinc and nickel were setting up for dramatic price returns in 2015.
A Cyclical Recovery in Zinc & Nickel Is Underway
Base metals in July was led by zinc which rose to US$1.05 per pound today from US$0.96 per pound a month ago.
“Commodity funds & investors have bid up zinc prices, anticipating tightening supplies over the next three- four years — with mine supplies not keeping pace with demand growth. In our view, zinc prices will climb to US$1.25 in 2015 and a very lucrative US$1.60-1.70 in 2016 (benefitting Teck, Lundin & Hudbay Minerals in Canada).”
“Global supply and demand conditions for ‘refined’ zinc are in ‘deficit’ in 2014 (that is, world consumption of slab zinc exceeds production), pulling down LME & Shanghai Futures Exchange stocks by 20.8% since late 2013,” Ms. Mohr noted. “Chinese imports of ‘refined’ zinc have jumped by 39.3% through July, given solid underlying demand growth—up about 7% in 2014, boosted by strong auto production (+9.4% YTD), the rising content of galvanized steel in cars to prevent rust (Chinese consumers are demanding higher-quality motor vehicles) and low operating rates at Chinese smelters (74%) due to weak treatment charges & poor profitability.”
Zinc concentrate is currently oversupplied but is expected to come under serious constraint in the coming years as mines deplete their reserves and exploration efforts over the past decade haven’t been able to replace the pace of extraction.
Market Conditions to Get Tight in 2016
MMG Limited’s Century zinc mine in Australia is currently in what the company calls a ‘transition period’, which means the mine will no longer produce zinc as of 2015.
In 2014, the mine is expected to produce up to 480,000 tonnes of zinc concentrate, making it the third largest zinc mine in the world. The Lisheen mine (owned by The Vedanta Group (OTCPK:VDNRF), India’s largest mining company) is set to close in 2016 and currently produces 132,000 tonnes of zinc concentrate annually.
Recent closure of a pair of Canadian zinc mines in 2013 also puts a strain on supply. Glencore’s (OTCPK:GLNCY) (then Xstrata Zinc’s) Brunswick mine which produced 190,000 tonnes per year as well as their Perseverance mine which produced roughly 125,000 tonnes of zinc per year both closed their operations last year.
Ms. Mohr notes:
“Overall mine output should ramp up — Glencore’s McArthur River in Australia, Boliden’s Garpenberg in Sweden, reactivation of Teck’s Pend Oreille mine — after almost no gain in 2014. However, recent prices have not been high enough to ‘incent’ sufficient new mine development (at least US$1.13 is required and much more, say US$1.60, late decade) to meet world demand. Market conditions will become genuinely tight in 2016.”
Nickel’s Nice Too
“A recovery in nickel prices is also underway,” the senior Scotiabank economists says.
“LME nickel has spurted from US$6.31 per pound in December 2013 to US$8.64 in July and should climb to US$10.75 in 2015 and US$12 in 2016.”
She highlights the January 2014 export ban on unprocessed nickel ore from Indonesia to hold which puts a strain on as much as 28% of the world supply.
“The world supply & demand balance will shift into a marked ‘deficit’ in 2015, as China depletes its inventory of Indonesian ore for ‘Nickel Pig Iron’ production (used in stainless steel). Chinese users have already rushed to step-up purchases of Ferro- Nickel (FeNi) and nickel-containing ore from the Philippines, though Filipino mines with ore grading more than 1.5% nickel have now all been suspended due to environmental breaches.”
Ms. Mohr expects prices to remain high until the back half of 2016 when new processing plants become available in Indonesia. According to her, there have been 16 new plants proposed with most being backed by China.
On the nickel side, there are very few companies with significant exposure. Sherritt International (OTCPK:SHERF, S:TSX) is one them.
Lundin Mining (OTC:LUNCF, LUN:TSX) is probably the best way to gain exposure to zinc and nickel combined as they are significant producers of both, especially with their Eagle nickel mine expected to ramp-up to full production in 2015. Eagle is expected to produce 23,000 tonnes of nickel annually starting next year.Disclosure: No positions
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.