BASE METALS

Scotiabank forecasts US$4/lb. copper price for 2011, 2012

While copper consumption growth is expected to slow in China, iron ore prices in the country will stay strong, Scotiabank VP Patricia Mohr forecasts, which bodes well for Canadian iron ore miners.

RENO, NV - 

Current copper prices are still quite profitable for copper miners, yielding a 54% profit margin over average world breakeven costs including royalties, depreciation and interest expense, says Scotiabank economist Patricia Mohr.

Recent on-the-ground surveys point to soft orders for China's copper fabricators in the fourth quarter, though global supply & demand are expected to remain balanced with a slight deficit of 30,000 tonnes, Mohr observed in the recent Scotiabank Commodity Price Index.

China's refined copper consumption should advance by 8% in 2011, though the pace of growth will decelerate from 11% yr/yr in the first half of this year to 7% yr/yr in the third quarter to 4.5% yr/yr in the fourth quarter, she said.

With a slower than normal seasonal pick-up in copper demand now anticipated for China in the fourth quarter, Scotiabank revised down its average price forecast to just over US$4 per pound for 2011 and 2012. However, Mohr predicted, "Copper prices could well rally back as 2012 unfolds."

Meanwhile, zinc and nickel "have also been buffeted by concern over the economic outlook, though current LME zinc prices at US$0.85 per pound still yield average world profit margins of 39%," Mohr noted. "Nickel at US$8.38 is also at a lucrative level."

However, Mohr observed, aluminum prices, hovering around US$1 per pound, are only marginally profitable. "While China could soon become a net importer, given its double-digit consumption growth, we believe China will attempt to maintain its aluminum self-sufficiency for a while longer," she advised. "The shutdown of older, higher-cost smelters in the East will be more than offset by huge smelter expansion in the Western and Northern provinces, where ample supplies of steam coal are being developed for power generation."

Mohr also predicted, "Iron ore prices will stay strong in China-underpinned by curtailed shipments from India, the world's third-largest exporter of iron ore-a positive development for Labrador, Quebec and Baffin Island iron ore miners."

"India's exports will continue to fall over the short term due to higher export duties, an increasing number of mining bans linked to the environmental damage from illegal mining in states such as Karnataka and growing domestic steel production," she added.

"The outlook for potash remains firm," Mohr advised. She forecasts that spot prices for standard grade potash will increase by US$25 to US$535 (cfr or delivered) in Southeast Asia in the fourth quarter, "though sales have so far been spotty, with ample inventories in Malaysia and Indonesia, built up earlier this year."