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BMO foresees upside in commodities' prices after anxious summer

BMO expects commodities to rally and perform quite well due to continued strong growth in China and ongoing recovery in the western world in the next 18 months.

Author: Dorothy Kosich
Posted: Friday , 23 Jul 2010

RENO, NV -

BMO Capital Markets Global Mining Research said it expects precious metals to outperform both base metals and the bulk commodity complex at least for the next six months.

The long-term gold price was lifted 18% to US$1,000 per ounce while the silver long-term price forecast was boosted US$15 due to rising costs and decline in orebody quality.

BMO Research expects platinum, palladium and silver to outperform gold into next year, benefiting from "their quasi-money properties and high industrial use."

Copper, metallurgical coal and iron ore at BMO's top industrial commodity picks due to strong fundaments and China's dependence on these commodities. Copper prices are expected to be up 15% in the first quarter of 2011, while met coal is anticipated to be up 6% and iron ore, 5%.

Gold Gets Lift from Systemic Risk

In his analysis, BMO Global Commodities Strategist Bart Melek forecasts that gold and other precious metals are projected to do very well over the next several years.

Melek identified key drivers for the precious metals as investors concerns over the viability of the euro and fiat currencies, "an eventual move towards a higher inflation environment amid massive western world fiscal imbalances, and improvements in fabrication demand as the world continues to pull out of recession."

He forecasts gold will likely continue to reach new records in 2011, speculating that U.S. dollar concerns will justify gold prices near $1,300/oz next year.

"Spiraling deficits, ballooning government debts and risk of eventual monetization" are all supportive of gold, Melek asserted. "The expectation that the Fed, the ECB and other central banks will largely be on hold well into 2011 are additional factors that are likely to keep investors buying gold and willing to pay a premium for the insurance properties the metal offers."

He suggested that a higher Chinese Yuan also represents an upside for gold as the metal benefits from a weaker trade-weighted U.S. dollar over the long term. There may also be competitive devaluations of western world currencies.

Melek noted that BMO Research is "quite comfortable with the $1,300 price forecast for 2011."

Meanwhile, the combination of strong investor and consumer gold demand and rising costs to develop new primary gold mine supplies "due to the relative scarcity of above-average quality project in the pipeline has prompted BMO Research to lift the long-term gold price by 17.6% to $1,000/oz," he advised.

Silver a Star Performer into 2011

Silver gained 6.5% during the second quarter and is expected to continue to benefit from its precious metals qualities due to sovereign debt uncertainty in Europe and rising industry demand over the next 18 months.

"A significant and sustained rally is realistically possible when more is known about what demand growth and the path of the global economy will look like and this is likely to happen after the summer," Melek advised.

"BMO Research forecasts the silver price to appreciate during the remainder of the year amid muted supply growth and still uncertain outcome of the sovereign debt issues," Melek said.

The BMO Research silver forecast for 2011 is US$21/oz.

Platinum's Correction an Opportunity

A significant overhang in platinum inventories prompts BMO Research to expect this year's surplus to reach 223,000 ounces.

"These accumulations, however, are expected to greatly diminish and move toward a much more balanced situation in 2011," Melek predicted. "Restocking and consumption increases will likely be the key drivers responsible for the expected market tightening."

"As the global economy continues to recover and strong industrial demand persists, platinum should benefit greatly," he added.

"BMO Research price projection remains bullish for 2010, despite a recent correction," Melek advised. "Rising costs of production, especially in South Africa after Eskom's sharp price increases, should provide a bullish case for the platinum price."

Melek forecasts an average platinum price of $1,636/oz for this year and $1,800/oz for 2011.

Palladium a Buying Opportunity

Strong car production and investment demand should support the palladium price over the next two years, Melek suggested.

Global ETF holdings have attracted about 1,770koz of palladium thus far this year, which he said "is supportive of BMO Research's bullish case for the metal.'

Palladium consumption is expected to grow by 25% over the next two years through 2011.

With demand growth increasing by almost 10% in 2011 and mining supply growing at 8.5%, BMO Research predicts a surplus of only 96,000 ounces of palladium next year, "which serves as a catalyst for its high price forecast."

BMO expects palladium to average US$479/oz in 2010 and $525/oz in 2011. Long-term palladium prices are projected to be $400/oz "with considerable upside risk due to a severe structural deficit, rising production costs and the market's dependence on Russian stocks for balance," Melek advised.

Copper Moving Higher Over Very Bumpy Road

Deficit expectations and sliding LME inventories make copper BMO Research's top industrial commodity pick. However, Melek cautioned, "short-term price expectations have been downgraded modestly to reflect market volatility."

The considerable short-term downside risks mean it is unlikely that copper prices will have a sustainable rebound until after summer, BMO forecast.

"The downside risks are due to deterioration in positive market momentum, a possible reduction in Chinese expectations (due to seasonal factors and moderating economic industrial production/real estate activity), a stagnating U.S. employment environment and ongoing concerns surrounding Greece and other countries in fiscal difficulties," Melek said.

Nonetheless, anticipated "decent copper demand growth and deficits in 2010 and 2011 should limit the scale and duration of any short-term correction," he added.

Copper prices are projected to average $3.18/lb in the second half of this year and $3.70/lb in 2011.

More Pain before Iron Ore Turns

Chinese iron ore import reversals and slowing steel production in China have dragged iron ore prices lower.

Spot iron ore alone tumbled 20% in the past three weeks and over a third from the April 2010 peak due to record output by Chinese steelmakers that has likely flooded the market with steel this year.

At the same time, Chinese iron ore imports dropped 9.1% in June and more declines are expected.

Nevertheless, Melek advised, "The longer term looks more positive with iron ore prices expected to bounce higher after the summer."

"In spite of the tough conditions in recent weeks, there are no signs yet that mills are defaulting on iron ore shipments, as the slowdown in demand growth is likely seen as temporary," he noted. Melek views this situation as "a good sign for iron ore prices later in the year."

BMO Research expects spot iron ore fines delivered to China to average "a still very high US$120/t in H2/10 and US$125/t in 2011. "This implies that iron ore producers should book significant profits, which may very likely lift valuations."

Met Coal Story Also Dependent on Steel

In his analysis, Melek said, Met coal has been following a "well-defined downward trajectory during the summer months."

"Reflecting this view, BMO Research has cut the price forecast for met coal for H2/10 and 2011, with lower grades taking a somewhat bigger haircut."

Nevertheless, Melek said longer-term fundamentals look robust for met coal.

"BMO Research continues to see near-record prices for high quality metallurgical coal for at least the next several years, as demand is seen to be robust, while supply is expected to remain constrained," he forecast.

BMO dropped the 2010 hard coal contract price forecast from $197/t to $186/t as well as the 2011 price forecast from $220/t to $210/T.

Lead Returns to Fundamentals

A slowdown in China's economic growth had an adverse effect on the lead price. However, Melek advised, "China's recent moderation is supportive of base metals prices, including lead, over the long term, as it means further restriction action is likely unnecessary."

China is expected to consume 45% of global lead demand this year and is projected to consume as much as 50% of global demand by 2013.

Global lead supply growth is expected to end up slightly above demand this year. "Going forward, the supply growth is expected to ease materially, bringing relative inventories lower and producing a deficit in the latter part of 2011," Melek said.

"In sum, while market participants continue to monitor global economic developments, the lead price will most likely remain range bound through the summer until fundamentals stabilize for the better," he added.

BMO Research forecasts lead at a high 89-cents/lb in 2010 and 95-cents/lb in 2011.

Zinc's Uncertain Outlook

Zinc should remain under pressure and range-bound "until there are convincing signs that steel production, especially China is on an upswing," Melek advised. "BMO Research does not expect this to happen until the end of the summer."

Melek said the longer-term zinc price outlook looks better "as there are virtually no zinc mining projects in the pipeline while demand is expected to be stable."

However, warehouse inventories still remain high as the LME stocks stabilized at 600kt, representing downside risk.

BMO Research expects a large physical zinc surplus of 767kt this year and a 311kt surplus in 2011, before the market eventually moves into a deficit situation.

The BMO zinc price forecast has been dropped from $1.08 per pound to 92-cents per pound for 2010 and from $1.10/lb to 90-cents/lb in 2011.

Molybdenum Faces Uncertainty

Global molybdenum consumption is expected to increase by 9% this year to 458 million pounds, while total supply from primary and by-product concentrates is expected to gain 5% to 463 million pounds.

However, Melek suggested the growth of by-product moly could be greatly impacted by copper production. "With expectations developing in the copper market, miners are expected to ramp up production, which, in turn, would bring additional molybdenum to market."

BMO dropped its moly price forecast for this year from $16.82/lb to $15.69/lb.

Nickel Pressured

The end to labor strife at Vale's Sudbury operations could deliver 77.6kt of nickel into the market, plus a future settlement at Vale's Voisey's Bay facilities could move the nickel market from a deficit to a surplus.

"As such, a robust nickel price rally is not expected," Melek noted.

As third-quarter steel production may fall 12%, nickel consumption could drop some 8% to 340kt, according to BMO.

"Overall, the uncertainty surrounding global economic growth and slowing demand for steel products will pressure the nickel price," Melek advised. "The possibility of a substantial decrease in global steel output is also supportive of the bearish case for nickel over the near-term horizon."

BMO's nickel price forecast has dropped from $9.78/lb to $9.28/lb for 2010.

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