The all-powerful U.S. dollar is currently hammering base metals and base metal equities. Haywood Securities Mining Analyst Stefan Ioannou says that increasing demand and near-term supply shortages make base metals a bargain that won’t last. In this interview with The Mining Report, Ioannou argues that juniors with good deposits and low costs are in a unique position to benefit, and lists several companies that look to do just that.
The Mining Report: What effect is the strong U.S. dollar having on base metal prices and base metal equities?
Stefan Ioannou: Base metals are priced in U.S. dollars, so as the dollar rises in value, base metals fall in value. Right now, copper is testing the $3 per pound ($3/lb) level, and zinc is drifting down toward $1/lb. And, of course, lower base metal prices are reflected in lower valuations of base metal equities.
TMR: Why is the U.S. dollar becoming stronger?
SI: Because of a strengthening U.S. economy or at least the perception of one. To give one example, the job creation figure for September was expected to be 215,000, but the number came in at 248,000.
TMR: How long will this U.S. dollar trend last?
SI: With quantitative easing seemingly over, which is still arguable, the big question for the U.S. economy is when and by how much will interest rates be increased. Elsewhere in the world, the other major economies seem to be, if not slipping, not really growing significantly. Europe is kind of flat. China is still growing but not nearly as fast as people had hoped for or expected. As a result, most world currencies are down relative to the U.S. dollar.
TMR: What are your forecasts for base metal prices?
SI: Our metal price forecasts for 2015 forward include $3.25/lb copper, $8.50/lb nickel and $1.15/lb zinc.
TMR: What are the economic assumptions underlying these forecasts?
SI: We try to pick metal prices that are arguably conservative, but we do take into account some of the major supply-demand fundamentals coming down the pipe. For example, zinc is facing a significant supply deficit into 2016, so we could see zinc rise above $1.50/lb fairly quickly. Would it stay there for more than two or three years? Probably not, given the anticipated increase in higher-cost Chinese production that higher zinc prices would trigger. Nevertheless, we see a medium-term investment opportunity emerging.
TMR: Given how important China is to world economic growth, how much do we really know about the Chinese economy?
SI: China has always been a bit of a mystery. The September Purchasing Managers Index (PMI) number was the same as August: 51.1. Anything over 50 indicates expanding growth, but it is subdued growth. The market has been looking to 7.5% GDP growth in China this year, but it looks as if it won’t make that.
The worrisome aspects to the Chinese economy are an ailing property market, industrial overcapacity and high levels of corporate debt. Housing is about 25% of the Chinese economy, so policymakers are now considering loosening mortgage restrictions.
TMR: Why do you believe the world faces a copper deficit in the near future?
SI: On the supply side, the majors have in the last few years focused on cutting costs at existing operations. That’s obviously great for their bottom lines today. However, it also means new mines and greenfield developments are being deferred. So by 2017–2018 we will face the consequence of a lack of new supply, which is demand outweighing supply.
TMR: Does the world face a near-term nickel deficit as well?
SI: A big driver for nickel is the steel market, and this has been relatively bearish. This year, however, Indonesia, which provides 25% of world supply, banned the export of nickel ore. Indonesia wants the economic benefits of processing its ore in country, but it will take a couple of years to build its infrastructure so that this lost supply will re-enter the global market.
The Philippines is also now considering an export ban of its own. This country supplies less than 10% of the world market, but it’s still a significant number. Nickel ore stockpiles in China and elsewhere are still high, but are now being drawn down toward potentially critical levels. There is a bullish argument that we could see the nickel market slip into deficit by as early as mid-2015.