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Soaring prices this month for copper and iron ore are leading some people to think that we are on the verge of a new supercycle. But as our new reporter Henry Lazenby reports in this week’s issue of the newspaper, conversations with analysts suggest we aren’t there yet and prices are likely to taper.
“We expect the impact of recovery optimism on metals prices to wane into 2022, as economies normalize activity post the Covid-19 crisis,” Ronnie Cecil, principal analyst for metals and mining research at S&P Global Market Intelligence told Lazenby. “Currently, we do not feel that the recent sharp price increases seen for iron ore and copper mark the dawn of a new supercycle.”
While we may not be in the early stages of a supercycle or even heading that way, we are certainly in the midst of a bull market the likes of which our industry hasn’t seen for many years, and demand for certain metals — particularly metals important to future technologies (MIFTs) and those used in energy storage and transmission for the switch to cleaner energy sources — suggest that the ‘good times’ are likely to stick around for a while.
“The metals sector has the greatest potential to continue outperforming most commodities as we see it, particularly in the longer term,” Mike McGlone, a senior commodity strategist at Bloomberg, wrote in the May edition of the Bloomberg Commodity Outlook 2021 released at the end of April. “In a world of accelerating electrification and decarbonization, we see copper as a top commodity candidate for sustained price appreciation … The trend in industrial metals outperforming energy is set to speed up with the U.S. joining others focused on a greener future.”
Goldman Sachs’ talk last month of copper as the “new oil” and its prediction that the metal will hit US$6.80 per lb. (US$15,000 per tonne) by 2025, buttresses this opinion, while Leigh Goehring and Adam Rozencwajg, managing partners of Goehring & Rozencwajg Natural Resource Investors, expect copper to “potentially peak near US$15 per pound by the latter part of this decade.” (They also pointed out that in the copper bull market of 2001 to 2011, the metal rose from US60¢ per lb. to $4.62 per lb., before sinking back to US$1.95 per lb. in 2016.)
“Our models strongly suggest copper mine supply growth will grind to a halt this decade,” they warned in their first quarter report, pointing to declining world-class discoveries coming on line, depletion problems at existing mines, and “geological constraints surrounding copper porphyry deposits, a subject few analysts and investors understand,” that will “contribute to the problems.”
“Stagnating copper mine supply, already colliding with strong demand, will push copper prices far higher than anyone suspects,” they continued. “Our research strongly suggests that supply growth, which has been minimal since 2016, will continue to disappoint.” Almost 80% of the industry’s gross new reserves that were booked between 2001 and 2014, they said, “came not from new discoveries, nor from finding new copper zones within, alongside, or beneath existing deposits,” but rather “from re-classifying what had been considered waste rock into minable ore – a process known in the industry as ‘lowering the cut-off grade’.”
While new projects like Kamoa/Kakula in the Democratic Republic of the Congo and the block-cave at the Oyu Tolgoi mine in Mongolia, “will likely serve to offset depletion,” they conceded, “it seems difficult to see how reserves and production can grow materially” given “the huge slowdown in discoveries, the weak reserve additions over the past decade, and the inability to add reserves by lowering the cut-off grade.”
Meanwhile, analysts at Bank of America say they “expect especially the base metals to rally further from here,” and on May 11 raised their price forecasts for copper, nickel, aluminum, lead, and zinc. The bank now forecasts copper will average US$4.80 per lb. (US$10,572 per tonne) in 2021, up 12.7% from its previous forecast of US$4.26 per lb. (US$9,381 per tonne), and rise a further 32.5% next year to US$5.78 per lb. (US$12,750 per tonne), up from its earlier forecast of US$4.37 per lb. (US$9,625 per tonne).
“Copper demand is getting stronger ex-China and decarbonisation will likely lift potential consumption growth by 50bp medium-term; this is significant considering the lack of mine capex,” the bank said in a report. “The red metal should rally to US$13,000 per tonne (US$5.90 per lb.) in the coming eighteen months.”
As for nickel, BofA is expecting it to climb to US$7.92 per lb. (US$17,456 per tonne) this year before falling to US$6.92 per lb. (US$15,250 per tonne) in 2022; while zinc it says will average US$1.35 per lb. (US$2,976 per tonne) in 2021 before slipping to US$1.25 per lb. (US$2,750 per tonne) in 2022. “Nickel is also a MIFT but is handicapped by production increases in Indonesia,” the BofA states, while zinc “could push higher still as the project pipeline is relatively empty.”
The analysts forecast aluminum will average US$1.11 per lb. (US$2,455 per tonne) this year and US$1.30 per lb. (US$2,875) and expect the metal “to hit new all-time highs at +US$3,500 per tonne (US$1.59 per lb.),” while lead will average US94¢ (US$2,072 per tonne) this year and rise to US$1.02 per lb. (US$2,251 per tonne) next year.
When it comes to bulk commodities, BofA has raised its price forecast on iron ore fines this year to US$172 per tonne cif, up 27.5% from its previous forecast of US$135 per tonne, and expects prices will average $144 per tonne next year, up from US$110 per tonne, or 30.7%.
If that’s not a bull market, I don’t know what is.
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