Credit Suisse forecasts growth period for long-term commodity demand

Credit Suisse analysts say they continue to like the long-term story for metal demand, suggesting demand will remain at strong levels in the next 10-15 years.

RENO, NV - 

In recently published research, Credit Suisse metals and mining analysts say they are "selectively bullish" on certain commodities-such as copper, zinc, carbon steel, platinum and nickel-and remain "long-term bullish" on commodity demand driven by demographics and global infrastructure spend.

Credit Suisse's analysis suggests we are currently in a growth period for long-term commodity demand driven by the ongoing industrialization of China and emerging markets; global demographic shifts that will drive commodity-intensive demand for infrastructure; and by a wealth-transfer effect which requires infrastructure that is the "single greatest driver of long-term commodity demand."

Research analysts Michael Sillaker, Elly Ong, Alessandro Abate, and Hannah Kirby wrote, "We believe global industrialization will continue and, as such, ongoing demand for commodities should remain strong. Against this backdrop, we believe there is substantial long-term upside potential for steel, metals and mining stocks."

In their analysis, the analysts determined China's apparent metals consumptions appears "way ahead of real demand growth rates." They believe "China is arbitraging the West on commodity prices. It is acting as an effective ‘vacuum cleaner' for commodity demand in an ex-China recession, which would not have been material ten years ago."

"China appears in effect to be frontloading its own industrial recovery and stimulus by buying commodities as a cheap asset class. This compares with the Western world, which tends to buy most when demand is at its peak and prices are high. This is a well thought-out strategy from China but we should caution that apparent demand growth rates are well above where we see real demand growth right now and, as such, demand from China is unsustainably high in our view."

Credit Suisse's analysis suggests the country is currently consuming the amount of copper it should be consuming in 2011/2012. "There is a risk of a pull back, especially if prices start to rise, and any rapid pullback is unlikely to be matched by ex [external] China demand growth."

Meanwhile, the analysts forecast "a substantial tightening in the ex China supply-demand balance for all commodities (although some more than others)."

"We continue to like the long-term story for metal demand," the analysts said. "Like the 1950s and ‘60s post-war restructuring phase (when metal demand grew in the 6-8% range), we are now in what we believe is a long-term industrialization phase. ...Therefore, after the cyclical recovery, we forecast, metals demand should structurally remain at relatively strong trend levels in the next 10-15 years."

Credit Suisse advises the strongest commodities for its long-term view of the global metals and mining sector are:

•1)       Copper-potentially 21mt of demand by 2012 will not likely be met by new mine capacity. Even under a significant long-term slowdown in China, "we would get to 25mt of copper demand by 2016-which means new mines are necessary. When new mines are necessary the pricing dynamics should move from cost plus pricing to long-term pricing that satisfies the IRR of newbuild."

•2)       Zinc-"Although zinc is not favoured by many investors, we believe they often forget how late-cycle this metal is (within the 20-30-year cycle). ...Mine depletions from 2012E could be significant, although Chinese production capability is potentially large in our view. ...We believe China's mined output is in general small scale and ‘inefficient' and hence high cost, which is unlikely to be cost effective in a demand boom. We expect a sharp price increase in zinc in 2011/12, which will be required if CEOs are to be encouraged into building new projects."

•3)       Iron ore-"we are positive structurally on volume, as low-cost high-quality ore continues to take market share from high-cost production, notably in China and India, as the steel market continues to grow at 4-5% in the long term. Nonetheless, given spare capacity (largely higher cost), new volumes from the seaborne majors will, we believe, come at the expense of price in the long term."

•4)       Coal-thermal coal looks set for the long term. Metallurgical coal is structurally tight in supply, but geared to external Chinese demand; "so it may take time to return to 2008 levels."

•5)       Platinum-"limited new capacity, ongoing supply problems, and increasing global care and jewellery market, with cleaner cars suggesting a long-term switch to diesel. Fuel cell demand remains a positive long-term possibility."

"If investors, like us, favour the above commodities, then Rio, Anglo or Xstrata are probably the equities to own," the analysts advised.

‘BHP possibly has the best commodity mix and the strongest growth profile of the stocks in our universe. The problem we have with the stock is that the market appears fully aware of this and the stock therefore appears to have priced this in," they said. "We do think, however, that BHP is a relatively strong defensive play in the cyclical universe for more cautious investors wanting cyclical exposure."

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