Credit Suisse has released a research piece broadly bullish on metals prices in the medium and long term this week. The paper covered in Mineweb specifically calls out copper, zinc, carbon steel, platinum and nickel as being driven by on-going demand from emerging markets and growing supply constraints due to mine closures. Unfortunately the report doesn’t quote any numbers as to what they predict the price of these commodities will do but they do make certain interesting comments that are worth reviewing.
The first is the bank believes China is front loading its industrial recovery over the next few years by stockpiling commodities while they are cheap. We would argue they could have done much more, and if they hadn’t made such a song and dance about it they could have purchased a lot more metal before the markets realized and reacted by jumping onto the bandwagon. The volumes purchased by the state are not large in comparison to total Chinese consumption and the benefit to China’s industry in accessing low priced metal will be limited. Purchasing for stock by consumers and traders has been more significant but even that could work through the system in a matter of months at current rates. Credit Suisse made an interesting statement – 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 external China demand growth.” The tough assessment is how much is consumption and how much is speculative buying but we have covered that topic elsewhere.
The bank is particularly bullish about the long term trend saying emerging markets are in a long term industrialization phase which will drive demand and hence prices for the next 10-15 years ” sounds a lot like the old super cycle model. Specifically the bank says:
Copper demand could be at 21 m tons by 2012 and 25 m tons by 2016 although Chinese primary metal imports are dramatically up on previous years. A significant part of this is stocking, not consumption and some of the rest is primary metal substitution for scrap. Meanwhile, consumption is down in the rest of the world so we question if this rate of China buying will be sustained at higher prices and whether world demand will reach 21m tons when it has hovered around 17-18 m during 2006-2009 (ICSG).
The bank is keen on zinc, expecting sharp price increases in 2011/12, largely due to rising global demand meeting the effects of current mine closures. It is true that there has been significant production idled and it is rarely brought back on stream quickly once it has been closed down, but much of this year’s capacity has been taken out on care and maintenance not long term shutdown so significant capacity could be bought back within a year. Falling grades are more of a worry for us although the bank does not raise that as a specific issue.
The bank’s message on iron ore is opaque at best but they seem to say volumes will grow and most of the growth will come from seaborne trade, meaning Vale, BHP, and Rio rather than domestically produced lower grade ores in China and India. In view of the relatively plentiful supply, price rises should remain modest; of course they won’t because the market has a limited number of suppliers but how fast and how far remains to be seen.
Platinum is the only other metal specifically covered in the article and the bank is expecting price rises over the long term driven by limited new capacity and increasing demand from higher automotive clean air standards and a gradual return of the jewelry market.
In a completely separate report released by the bank’s emerging markets department Dong Tao, Credit Suisse Chief Regional Economist for non-Japan Asia introduces a word of caution “China’s continued monetary expansion also brings the threat of inflation next year. We have revised up our year-end consumer price index forecast from 2.5% to 4.1% year-on-year for 2010.” As we have reported elsewhere any move to ward off the threat of inflation in China, like the restriction of bank credit and raising interest rates could bring the recovery to a shuddering halt. China has only kept itself growing by a massive injection of money into the economy. To what extent it manages to wean itself off that lifeline and back to stable growth remains to be seen.