Peak price cycle for base metals
In a report marking the beginning of non-ferrous
metals and mining coverage, United States investment bank Morgan
Stanley said it expected base metals prices to remain at historically
high levels given the number of factors constraining output.
Though many investors are focused on demand
given the rapid escalation of metals prices recently, Morgan
Stanley said it is focused on supply. “We think a [price]
correction requires evidence of increased supply,” the
bank said in a May 2 report.
Chinese metals demand and government efforts
to cool the surging economy will be critical for mining equities,
Morgan Stanley said. “However, we believe that a material
retrenchment of metals prices will be driven by an increase
in supply, which is not on the horizon. The industry has been
running hard to take advantage of price strength. Supply disruptions
due to operating problems and labor disputes are becoming commonplace
and will restrict output, in our opinion.”
Historically, commodity analysts have assumed
that prices following a cycle peak revert to trend pricing over
two to four years, Morgan Stanley noted. In the case of copper,
the historical profile forecasts average copper prices to fall
sharply from $2.75/lb. this year to just under $1/lb. by mid
2008 and trend sideways to about 90 cents/lb. by 2014. But analysts
appear to be revising their forecasts to current consensus levels,
which represent a more gradual decline in the forecast curve.
That profile, however, still assumes that
prices fall from current peaks levels and decay back to a long-term
price over the next 5 to 6 years, in the case of copper to $1.10/lb.
(i.e. extending the cycle by about two years). That consensus
could still prove too conservative, Morgan Stanley said.
Instead, long-term price estimates need to
adjust to structurally higher costs, with positive implications
for mining equities, the bank said. “A substantial upward
re-basing of industry capital and operating costs leads us to
believe that either the extended peak or the bull case profile
[in which average prices copper prices remain above $3/lb. until
mid-2009 and decline to $1.50/lb. by 2014 is a much more likely
outcome for prices over the next 5 to 7 years.”
Morgan Stanley defines the bull case scenario
as one in which supply disruptions and strong near-term demand
keep metals at elevated prices into 2008, followed by a gradual
decline to trend pricing as new projects take an extended period
to add to supply.
Though new projects are coming on-stream and
exploration spending is on the rise, these are long-term fixes,
the bank noted, “and we believe a number of factors will
contribute to extended timelines for new supply.” Those
factors include skilled labor shortages; greater ore body depth
requiring underground mining; lack of large-scale deposits in
the developed world; permitting delays; and higher costs for
raw materials, energy and consumables.
Morgan Stanley said it favors the stocks of
metals and mining companies with the best potential if metals
prices overshoot consensus estimates. Those companies include
copper miner Phelps Dodge, aluminium producer Century Aluminium,
and iron ore-pellet producer Cleveland-Cliffs.
—Published with permission from Platts.com,