Filed under: Thesis Proposal
BMO copper outlook-‘It’s always darkest before the dawn’
BMO says “virtually no unfunded project will begin in the next two years, owing to low prices and tight credit markets” while only a few fully-funded copperg> projects will meet their timetables.
BMO Capital Markets ‘ Bart Melek predicts the recession in the world’s highly industrialized nations is expected to erode copper demand and keep copper prices depressed “over at least the next year.”
Nevertheless, Melek asserts, “The BMO thesis that the fundamental commodities story is bullish remains intact. With the developing world set to keep copper demand growing and a recovery in the western world, we expect copper consumption in 2010 through 2013 to return to the approximately 3% annual growth level of recent years and to trend slightly higher thereafter.”
BMO projects that copper prices will average US$1.50/lb in the next three months, $1.85/lb for 2009 and $2.50/lb in 2010. “The metal looks likely to revisit recent annual highs near US$3.00/lb starting in 2011, before settling closer to US$2.20/lb long term, which we estimate is the price needed to balance supply with demand,” Melek said.
“The long-term copper price story remains upbeat,” Global Market Strategist Melek said, “as the need for massive infrastructure spending associated with industrialization and urbanization in the developing world is not expected to diminish.”
In an analysis published Monday, Melek said, “The fallout from the credit crisis that’s dragging the world’s advanced economies into a synchronized recession is also likely to tile the copper market into a surplus projected to be flat (18.1 Mt) in 2009, down from an average of 2.1% in the three previous years.”
Global economic woes are expected to translate into what Melek terms “a material slowdown in Chinese(cnmining) copper demand. Uncertainty brought on by shaky real estate values may also mean that Chinese consumers may be less inclined to purchase durable goods-a negative development for global copper demand.”
For the first time in six years, lower Chinese copper demand is predicted to move the copper market into a material surplus of 411kt in 2009 and 323kt in 2009. This will lift commercial copper inventories from an average of 15.4 days’ supply in the past two years to 25 days in 2009 and 31 days in 2010, according to BMO.
The more than doubling of LME inventories has been a drag on copper prices, along with de-risking and deleveraging of portfolios in favor of cash. Meanwhile, Melek warned, “Judging by how other base metal prices have behaved in recent weeks and in precious cycles, copper can still move materially lower.”
Melek noted that many base metals prices “have already fallen well below the marginal costs of production, with more than an estimated 80% of nickel and zinc producers and 90% of aluminum producers currently underwater.”
“In the past six months, the BMO Capital Markets Base Metal Index has fallen 25% further than the peak-to-trough low reached 20 months into the 1974 recession and was the fastest decline in recent declines,” he explained.
BMO suggested that “virtually no unfunded project will begin in the next two years, owing to low prices and tight credit markets, and that only a fraction of highly probable (fully funded) projects will fulfil their stated timetables over the next two years.
In addition to production cuts, BMO says expansions are expected to be delayed and “new project development curbed.”
‘LIGHT ON THE HORIZON’
Nevertheless, Melek foresees a “light on the horizon for copper.” Global infrastructure programs now proposed in the U.S., China and other nations will be “a positive for copper consumption.”
The current Chinese fiscal plan include spending on housing, infrastructure, agriculture, health care and social welfare, and includes a tax deduction for capital spending by companies, which BMO says is “all conducive to increased consumption of copper.”
“A modest recovery is expected to start after the worst of the economic downturn is over and done with, likely in the latter part of 2009,” Melek forecast. “At that time additional aggressive monetary easing by the G7 central banks and the People’s Bank of China (PBoC), and fiscal stimuli are expected to start bearing fruit.”