The Outlook for
Commodity Prices
and the Global Mining
Industry
Seminar on Surviving the Global
Financial Crisis in the Mining
Sector
Patricia M. Mohr
Vice-President, Economics
& Commodity Market Specialist
The Scotiabank Group, Toronto
Mine Africa
Radisson Admiral Harbourfront
Toronto, Ontario
January 13, 2009
Commodity Price Upswing
This Decade On a Par With 1970’s Expansion
300
280
Scotiabank Commodity Price Index1
300
Index: 1997=100
260
280
240
220
200
160
140
(November 2008, % change yr/yr)
220
All Items
140
160
240
*
180
December 2002
December 2003
December 2004
December 2005
December 2006
December 2007
260
New record high in July
2008 at 226% above
cyclical low
Scotiabank Commodity
Price Index, % change yr/yr
200
180
120
120
100
100
80
80
Oil & Gas
60
60
Metals & Minerals
40
Forest Products
40
Arab Oil
Embargo
October 2001
Bottom
20
20
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
A trade-weighted U.S. dollar-based index of principal Canadian exports.
Shaded areas represent U.S. recession periods.
All Items
Agriculture
17.9%
17.3%
19.0%
24.4%
5.4%
10.2%
-12.8
-30.4
-5.0
1.7
-12.0
Commodity Prices Retreat From Record High in July 2008
The ‘Bull-Run’ in commodities continued in 2008:H1 due to ongoing
strength in China’s GDP growth, under-investment in oil & gas and
metals during the 1990s and delays in expanding capacity this
decade.
Interest by investment funds in commodities as a ‘hedge against a
declining U.S. dollar’ and a major rejuvenation in international grain &
oilseed prices – linked to biofuel development and tight global
supplies – also pushed up commodity prices. Fertilizer prices
(especially potash) rose to record levels.
However, after reaching a cyclical peak in July 2008, Scotiabank’s
Commodity Price Index plunged by a sharp 35.8% through November
and dropped further in December alongside a faltering global
economy – ushered in by a U.S. and European banking crisis,
deleveraging by financial institutions and much tighter global credit
conditions. Most G7 economies are now contracting.
Hedge Funds Exit Oil & Metal Positions
While inter-bank lending has improved – following government guarantees on
inter-bank lending in Europe, government capital injections into financial
institutions to shore up their balance sheets and massive central bank
liquidity injections – tighter credit will contribute to sharply paring global
growth from 5% in 2006 and 2007 to about 0.5-1.0% in 2009. This will occur,
even with relative strength in ‘emerging markets’ such as China, where GDP
growth should still advance by 7.0% in 2009 – though well below the
estimated 9.5% of 2008 and 11.9% of 2007.
The sudden and unusually sharp decline in commodity prices since the July
peak reflects the exit of many hedge funds from long commodity ‘futures’
positions and ‘commodity index-linked investments’—forced by fund
redemptions and tighter credit – as well as a shift to record short positions by
funds and trading companies.
Investment in commodity index-linked securities – such as the Dow JonesAIG Commodity Index – fell from about US$200 bn at the end of June to no
more than US$150 bn in September and plunged in October - November.
30
China -- Vital to Global
Commodity Markets
30
yr/yr % change
20
China – Industrial
Production*
*3 mth moving avg.
November 2008
10
0
0
G7 Industrial Production
-10
98 99 00 01 02 03 04 05 06 07 08
Demand Growth in China
(2007, % change)
Crude Oil
4.6
5.4% yr/yr
20
10
-10
China Industrial Production:
Nickel
24.0
Copper
16.0
Aluminium
38.8
Slab Zinc
11.5
Iron Ore
10.3
G7 Industrial Production -5.1% (Oct)
U.S.
-5.5% (Nov)
Japan
-13.3% (Nov)
Germany
-3.9% (Oct)
China shifts policy in mid-September 2008
from preventing ‘overheating’ to
supporting fast and steady growth;
monetary policy has been eased
decisively, while a massive fiscal stimulus
package (infrastructure spending) has
been announced for 2008:Q4 -2010.
13
12
GDP (% per annum)
‘Emerging Markets’ Should
Provide Some Offset To G7 Contraction
2006
2007
2008F
2009F
2010F
WORLD*
5.1
5.0
3.5
0.5-1.0
2.5
CANADA
3.1
2.7
0.7
-1.2
1.9
UNITED
STATES
2.8
2.0
1.2
-2.1
1.7
CHINA
11.6
11.9
9.5
7.0
8.5
INDIA
9.6
9.0
7.0
5.5
6.5
SOUTH
KOREA
5.0
5.0
4.2
-1.0
2.5
yr/yr %
change
11
2007
2008F
10
9
2009F
8
7
6
Widening credit squeeze
reduces growth prospects.
5
4
3
2
1
0
-1
-2
-3
World
China
United
States
Japan
Euro Zone
A ‘seismic’ shift in global growth has occurred from the G7 to
‘emerging markets’ this decade.
*Global GDP estimate based on “purchasing power
parity,” as used by the IMF.
Average 1988-1997: 3.4% p.a. prior to the “economic
take-off” in China and India.
2.75
U.S. Housing Starts
millions of units, quarterly, annualized
2.50
2.25
2.75
2.50
1978 – Strong ‘Baby-Boom’ Demand
U.S. Housing Start Outlook
(million units)
2006
1.80
2007
1.36
2.25
2.00
2.00
1.75
1.75
2008F
0.90
1.50
1.50
2009F
0.65
1.25
1.25
2010F
0.85
1.00
1.00
0.75
0.75
Tighter U.S. lending standards, high
home inventories and severe
employment losses point to
prolonged U.S. slowdown.
Total
Single-Family Units
0.50
0.50
0.25
0.25
76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
U.S. housing starts at 625,000 units in November 2008
were the lowest in data back to 1959.
Shaded areas represent U.S. recession periods.
The plunge in U.S. new singlefamily home sales since the
peak in 2005:Q3 at – 72.2% has
exceeded the drop in the early
1980’s recession.
The Fed Takes Action to Stem Fallout from Sub-prime
Mortgage Meltdown
Federal Funds –
Effective Rates
20
20
per cent
15
15
“Real” Federal Funds Rate
(Adjusted for Inflation)*
15
per cent
15
January 2009 = -1.65%
Average = 2.31%
10
10
Average
10
10
5
5
5
5
0
0
0
0
-5
-5
60
65
70
75
80
85
90
95
00
05
10
Federal Funds Target Rate is 0.25% in January 2009.
Fed Funds expected to remain virtually flat through 2010:H1.
60
65
70
75
80
85
90
95
00
05
10
* Inflation-adjusted with the U.S. Personal Consumption Deflator
(PCE) and the core PCE. Shaded areas represent U.S. recession
periods.
Credit Conditions Tighten Globally In September & October 2008
USD Libor Shows Significant
Improvement in Late October
8
8
%
6
6
3-month
4
2
4
2
Overnight
+Inter-bank
lending
thaws
0
0
02
+following
03
04
05
06
07
08
09
government guarantees on inter-bank lending and capital injections into
banks and other financial institutions in the U.K. and Western Europe in October.
However, general credit conditions remain tight.
150
140
Oil Prices Tumble from Record High
*
US$ per barrel
130
110
90
80
120
110
100
OPEC announces output cuts of
4.2 mb/d in Sept/08 – Jan/09 to
shore up prices.
90
80
70
70
60
Iranian
Revolution
50
40
30
20
140
After a Weak 2009, Oil Prices
Will Likely Rebound MediumTerm
130
New Record High:
July 11, 2008: US$147.90
120
100
150
Iraq
War
Gulf
War
60
50
40
Arab Oil
Embargo
30
20
10
10
0
0
60 64 68 72 76 80 84 88 92
Source: Scotiabank Commodity Price Index.
Data to January 6, 2009.
96
00
04
08
1990-99
2006
2007
2008F
2009F
2010F
2011-13F
US$19.69/bbl
US$66.22
US$72.32
US$99.65
US$55
US$70
US$95
A likely capital spending
slowdown on oil field
development in 2009, due to
tighter credit and the recent
slide in oil prices, sets the
stage for a strong rebound in
oil prices in 2011-13.
U.S. Economy Contracts
5
Waning U.S. Industrial Activity
yr/yr % change
U.S. Employment Growth
13.0
million units, quarterly
yr/yr % change
2.0
2.0
12.5
3
Industrial
Production
12.0
1
11.5
1.0
11.0
0.5
10.5
-1
U.S. Motor
Vehicle
Assemblies
-3
1.5
10.0
06
07
08
09
10
0.5
0.0
-0.5
Dec. 2008
-524,000
-1.0
Decline in
Past Year
-2,589,000
9.0
-7
1.0
U.S. Payrolls
Latest Data:
Declines in
0.0
Payrolls
9.5
-5
1.5
-0.5
-1.0
8.5
-1.5
-1.5
8.0
-2.0
-2.0
06
07
08
09
10
U.S. motor vehicle assemblies (including General Motors, Mitsubishi, Nissan…) expected to total 8.8 million
units in 2008, and 7.9 million in 2009, before edging up to 8.2 million in 2010. Assemblies averaged about
12 million from 1993-2007.
Scotiabank Metal and Mineral Price
Index Retreats from Record
390
390
Index: 1997=100
U.S. Equity Markets Lift Off
Bottom in January
1800
350
350
310
310
1600
Metal and Mineral Price Index in July
2008 reached a new record high –
123.8% above the June 1988 peak.
270
230
1800
Index: 1941-43=10
270
1600
S&P 500
1400
1400
1200
1200
1000
1000
230
190
190
150
150
110
110
Equity markets appear
to be bottoming.
800
70
70
30
30
72
76
80
84
88
92
96
00
04
08
Shaded areas represent U.S. recession periods.
Latest data: December 2008.
12
800
An Indicator of Financial Market
Distress & Economic Sentiment
Nov20/08
600
600
00
02
04
06
08
Commodity prices recently trade down with weak
equity markets in September – October 2008, but
rally in early January 2009.
10
4.50
4.00
Copper Prices Still at Profitable Level
US$ per pound
Record High: US$4.08
on July 3, 2008
*
3.50
+
2.50
1.50
4.00
3.50
3.00
2.00
4.50
Re-weighting of Dow JonesAIG Commodity Price Index
and S&P GSCI boosts base
metals (at least temporarily) in
early January.
3.00
2.50
Low During
Credit Squeeze
(Aug. 17, 2007)
2.00
1.50
1.00
1.00
0.50
0.50
0.00
0.00
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
LME cash settlement prices. * Latest data: early January 2009.
Price Outlook
2007
US$3.23
2008
US$3.15
2009F
US$1.30
2010F US$1.30-1.40
Copper Prices Will Likely
Outperform Other Base Metals
LME copper prices at US$1.44 on January 12, 2009 are still at profitable levels,
yielding a 16% margin over average world break-even costs including depreciation,
interest expense & royalties. However, prices are well below the 90th centile of
direct cash costs – triggering substantial production cuts and mine expansion
deferrals.
Copper prices could move down further in coming months, given prospects for a
contraction in world consumption of about -0.5% in 2009, after last year’s marked
deceleration in growth to only +0.6%. Global demand should pick up again
modestly in 2010 (+1.5%).
China’s copper consumption will decelerate from last year’s 8% growth (16% in
2007) to only 5%, given lower exports to the G7 and substantial inventory
liquidation in parts of the manufacturing sector (e.g. air conditioners) linked to a
domestic housing correction and industry rationalization. However, reduced
availability of imported copper scrap (due to lower prices) and China’s massive
infrastructure spending program (particularly on power generation & transmission
and the railways) will boost demand. Japan’s auto sector is dominated by export
demand and, with declining auto sales in the United States and Europe, Japan’s
automakers are being forced to cut output (-7.4% yr/yr in October). Copper
consumption is also quite weak in Western Europe (-4.2% expected in 2009).
Copper Inventories Will Only
Build Modestly in 2009
Copper prices are, nevertheless, expected to outperform other base
metals. While ‘visible’ exchange stocks on the LME, COMEX and
Shanghai Metal Exchange increased to 7.2 days of global consumption in
late 2008 (the highest since April 2004), stocks remain well below previous
peaks (May 2002 at 37 days and Oct 1993 at 23 days).
Prior to the downturn, planned new mine development was only modest
and will now be scaled back in 2009-10. In Central Africa, low prices,
political uncertainty and the credit crunch will delay new development.
Copper output from the DRC’s ‘informal sector’ will likely fall by 70,000
tonnes from its peak and the KOV project will be cancelled for technical
reasons, though Lumwana start-up proceeds well in Zambia.
Significant supply disruptions have been a feature of the copper market in
the past five years, with a combination of labour issues, equipment
failures/mining challenges and slow project ramp-up cutting planned
production by 1.4 million tonnes in 2008.
26
Nickel Prices Retreat
26
US$ per pound
24
24
22
22
20
May 16, 2007
New Record US$24.59
18
16
18
LME Nickel Prices
14
12
20
16
14
Previous Record
US$10.84 in March 1988
Stainless steel production
slowdown in Asia and Europe
pushes down prices in 2008.
Mine closures and delays in
ramping up new projects (possibly
at Goro and Onça-Puma) together
with stronger consumption point
to a rebound in prices by 2010.
12
10
10
8
8
6
6
2007
16.88
4
4
2008
9.57
2
2
0
0
2009F
4.20
2010F
4.80
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Latest data: early January 2009.
LME Nickel Prices
(US$ per pound)
U.S. Stainless Steel Prices
6500
6500
US$ per tonne
U.S. Midwest, spot prices
6000
6000
5500
5500
5000
5000
Stainless Steel
Prices - CR304*
4500
4500
4000
4000
3500
3500
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
98
00
02
04
06
08
Including alloy surcharges. Data to January 2009.
10
Expected
global
capital
spending slowdown in 2009
will pressure stainless steel
prices.
However, capital
spending should reaccelerate
early in the next decade.
2.50
Zinc Prices Ease
2.50
US$ per pound
2.00
LME Zinc Prices
(US$ per pound)
2.00
Zinc producers announce
pro-active output cuts to
shore up market conditions
1.50
1.50
1.00
1.00
0.50
0.50
0.00
0.00
80
84
88
92
96
00
04
08
12
LME official cash settlement prices. Data to early January 2009.
2007
1.47
2008
0.85
2009F
0.45
2010F
0.60
Collapse in Global Auto Production & Weak
Residential Construction Takes Toll on Zinc
The global supply/demand balance for zinc moved into a surplus in 2008, with
traders continuing to short the market through most of the year – initially in
anticipation of substantial new mine capability scheduled to come on stream and
later with growing realization that much of the G7 had entered recession.
Zinc prices fell to a low of US$0.47 per pound on December 12 – close to average
world cash costs – amid a collapse in demand in the global auto and construction
sectors. Prices peaked for the business cycle around US$2.09 in December 2006.
However, zinc prices rallied back in late December and early January and are
currently US$0.55. The market has responded favourably to substantial mine and
smelter production cutbacks as well as the annual re-jigging of the Dow JonesAIG Commodity Index, boosting the weighting of zinc, and news that China’s
State Reserves Bureau will buy about 200,000 tonnes of refined zinc from Chinese
smelters for its ‘strategic’ stockpile (intended to bolster hard-pressed domestic
smelters as well as take advantage of bargain prices). Interestingly, Yunnan
province may also buy reserves to shore up its beleaguered zinc smelting
industry.
Zinc Smelters Take Unusual Steps
To Bolster Market Conditions
Twenty zinc smelters (including Zhuzhou in China -20%, Trail -20% to
mid-2009, Kidd Creek -30% to mid-2009) have now announced deep
production cuts – a very unusual step. Smelters often wait until mine
concentrates dwindle before cutting output.
While bolstering market conditions, it would not be surprising to see zinc
prices retest previous lows in the first half of 2009. Zinc prices should
start to rebound on a sustained basis by the second half of 2010.
LME and COMEX inventories (at 10 days of global consumption in
December 2008) could rise further, but should stay below the very high
levels of 22 days in late 2004.
Gold – A Hedge Against
Economic Uncertainty
1,200
1,200
US$ per ounce
*
1,000
New Record:
March 17, 2008
US$1,032.70
Jan. 21, 1980
peak US$850
800
1,000
600
800
Price Outlook
2007
US$697
2008
US$872
2009F US$850-900
2010F
US$800
600
Gold Prices
London PM Fix
400
400
200
200
0
0
75
80
85
90
95
00
05
10
London PM Fix on Jan. 6, 2009: US$848.
Investor Interest in ETFs and retail interest in bars and coins remains strong.
Gold Should Shine as ‘Safe-Haven’ in 2009
Gold prices (London PM Fix) – traditionally considered a store of value
and a hedge against economic uncertainty – have held up better than
base metal prices.
However, a stronger trade-weighted U.S. dollar (especially against the
euro) from mid-July 2008 through November 20th – linked to some
improvement in the U.S. merchandise trade performance last summer,
but more importantly to a counter-intuitive flight to the ‘safe-haven’ of
U.S. Treasury securities during the height of the banking credit crisis last
Fall, prevented gold from climbing back to its previous March 2008
record high of US$1,032.70 and – in fact – pushed prices down.
A largely ‘deflationary’ economic environment, falling oil prices and the
forced exit of many hedge funds from commodity market positions also
contributed to a decline in gold prices to a low of US$712.50 on
October 24.
Gold Should Shine as ‘Safe-Haven’ in 2009
Gold prices subsequently rallied back to US$880 in late December
alongside renewed weakness in the U.S. dollar, given concerns over a
massive U.S. economic stimulus package and a budgetary deficit in
FY2009 (estimated at US$1.25 trillion).
While gold prices edged down to US$827 on January 12 (with commodity
index funds expected to cut their weightings in gold in early 2009, given
its outperformance last year), the big picture outlook for gold remains
bullish in 2009.
Asian and Middle Eastern central banks and sovereign wealth funds may
be less supportive of U.S. debt markets in the next 12-24 months, with
gold coming into its own as a true ‘safe-haven’.
U.S. Dollar Trade Weighted vs. Euro
120
US cents
monthly averages
March 1973=100
monthly averages
170
120
160
110
Canadian Dollar
120
US cents
monthly averages
110
110
100
100
90
90
150
euro
100
140
130
90
120
80
110
Commodity
prices slip
80
80
100
70
U.S. Dollar Trade Weighted
80
00
02
04
*Data to January 6, 2009.
06
08
70
60
60
90
60
98
70
10
98
00
02
04
06
08
10
Canadian dollar reached parity with the U.S. dollar on
Sept. 20th, 2007. Canadian Dollar: US$0.846 as of Jan.
6, 2009.
140
130
Spot Uranium Prices Will Rally in Medium Term
US$ per pound
140
130
120
Jan 5, 2009
120
110
Spot
US$53.00
110
100
LT Contract
US$70.00
100
90
90
80
70
US$43.40
Peak
60
50
Russian HEU
Agreement
Three Mile Cancelled Options
Island
80
70
60
50
40
40
Arab Oil
Embargo Low US$7.10
30
30
in Dec. 2000
20
20
Nuclear
Disarmament
10
0
72
76
80
84
88
10
0
92
96
00
Source: Scotiabank Commodity Price Index.
04
08
Spot Uranium Prices Will Rally in Medium-Term
The forced liquidation of commodity market investments by funds and individual
investors also affected the uranium market last October, when spot prices declined
to a low of US$44 per pound (an oversold position). Prices rallied back to US$55 in
late November -- as Asian utilities, commodity brokers and producers took advantage
of bargain prices – though bids have dropped back to the US$53 level as of early
January. Spot prices are expected to strengthen medium-term (to around US$70
from 2011-14). Term-contract prices remain lucrative.
‘Uncovered U3O8 requirements’ by North American utilities will be low in 2009, given
the re-stocking and term contracting of recent years.
However, three developments point to firmer prices in the medium-term: 1) India will
return as an importer of uranium concentrates in 2009 after more than a 30-year
absence, given approval by the World Nuclear Suppliers Group, and has now signed
bilateral nuclear cooperation agreements with the United States, France and Russia
(from whom it may import concentrates and equipment). Canada requires a similar
agreement. India has been operating its nuclear reactors at 50% of capability, given
inadequate domestic uranium supplies, and has huge nuclear power expansion
plans. 2) Delays in commissioning the Cigar Lake project and in Olympic Dam
expansion will dramatically tighten world supplies around 2011-13; and 3) Higher
capital and operating costs will lift the medium-term floor on prices.
Western Canadian Coking
Coal Prices Poised to Drop From
Record Levels
Steam Coal Prices
350
200
US$ per tonne, spot
US$ per tonne
300
FOB Newcastle, Australia
175
Western Canada
to Japan
250
Steam Coal Prices
150
FOB port
Premium-Grade
Hard Coking Coal
Contract Price
200
125
China’s Electricity
Shortage Boosts
Steam Coal Prices
Last Summer
100
150
100
75
50
50
0
July
October January
April
July
October
China imposes export tax of 10% on steam coal
and raises export tax on coking coal from 5% to
10% on August 20, 2008 to conserve supplies for
domestic power generation.
Contract price: Australia/Japan.
FY2008 US$125:FY2009 US$95 forecast.
*
03
04
05
06
07
08
09
10
Prices leapt to record US$300 in April 2008 from US$93.
*Forecast JFY 2009: US$192.
Source: Scotiabank Commodity Price Index.
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Recent Equity Leads
US$163,000,000
C$22,001,200
C$34,256,035
C$50,025,000
C$65,520,000
Common Shares
TSX IPO - Common Shares
Units
Common Shares
Common Shares
Co-Bookrunner
Sole Bookrunner
Sole Bookrunner
Sole Bookrunner
Sole Bookrunner
September 2008
February 2008
January 2008
November 2007
November 2007
Recent Advisory Transactions
Is merging with
Evaluating an unsolicited tender
offer and identifying potential
alternatives to enhance
shareholder value
has acquired
has consolidated its interest in
the Corani Silver Project by acquiring
the remaining 30% interest from
has acquired 100% of the Life of Mine Silver
Production from the Sabinas Mine of
to create a company with a combined
market capitalization of
for
for
for
C$550,000,000
US$1,200,000,000
US$75,000,000
US$350,000,000
Financial Advisor
Financial Advisor
Financial Advisor
Financial Advisor
Financial Advisor
Pending
Pending
October 2008
July 2008
May 2008
Strong Commitment to the Sector
This Report is prepared by Scotia Economics as a resource for the clients of
Scotiabank and Scotia Capital. While the information is from sources believed
reliable, neither the information nor the forecast shall be taken as a
representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any
of their employees incur responsibility.