BASE METALS

Global commodity assets under management increased to US$235b in 2009

Economist Pat Mohr says lead outshone all of the 32 commodities covered in the Scotiabank Commodity Index last year, delivering a "stellar performance."

RENO, NV - 

Scotiabank economist Patricia Mohr estimated Tuesday that US$60 billion flowed into commodity related investments last year-boosting global commodity assets under management to about US$235 billion in 2009, compared to only US$6-10 billion in 2008.

Although China has begun to tighten their monetary policy, Mohr found base metals prices eased back late this month, but "continue to hold their ground fairly well."

Fund and speculative interest in base metals has been driven by the China and emerging Asia story, she noted.

Of the 32 commodities covered in the Scotiabank Commodity Price Index, Mohr said lead was the strongest performing commodity last year. "Strong battery demand for E-Bikes in China (electrically driven bicycles) contributed substantially to this stellar performance," she noted.

Although worldwide supply/demand conditions for zinc and aluminum remains in technical surplus with worldwide production exceeding consumption, Mohr found "zinc and aluminum prices were bid up by G7 and Chinese investors on the coat tails of strong copper prices (underpinned by strong medium-term fundamentals for the red metal)."

"LME zinc prices-a metal which looms large in Canada as well as in Peru, where Scotiabank Peru is active-climbed from an already lucrative US$0.99 in November to US$1.08  per pound in December, spurting as high as US$1.20 on January 7^th (a 17-month high not seen since October 2007," she said. "Current prices yield a 45% profit margin over average world break-even costs."

In her analysis, Mohr noted significant gains in base metals, gold and sulphur more than countered slight declines in silver, cobalt, potash and uranium. Copper prices now stand at US$3.36/lb which Mohr said yields an exceptional 62% profit margin over full breakeven costs.

However, she anticipates that base metals prices will be more volatile in 2010, with another pullback possible, before climbing again in 2011. "We have revised our forecasts for base metal prices, with copper averaging US$3.00 in 2010 and US$3.50 in 2011," Mohr advised.

Despite record aluminum inventories on the LME and Shanghai Future Exchange in December, Mohr said LME aluminum prices posed an even bigger percentage gain than copper. "Two factors have been supportive-roughly 60-75% of LME aluminum stocks are held in warehouse financing deals established in early 2009, effectively holding them off the market, and smelter costs in China for the top ten percentile of producers are very high at US$0.99 per pound," she noted.

Mohr also found "increasingly short supplies of zinc concentrate relative to smelter requirements especially in China. " Meanwhile, ten zinc mines will deplete in the 2011-15 period, according to her research.

Meanwhile, Mohr noted potash prices touched bottom, "spurring step-up buying in the United States." Spot potash prices (FOB Vancouver) dropped to US$345 in early January while Belarusian Potash Company settled with China at US$350 cfr (cost and freight).

PotashCorp has reduced its prices into the United States to US$390 (FOB warehouse in the U.S. Midwest) until the end of February, after which prices are scheduled to increase to US$420, Mohr said.

"Fertilizer shipments have recently picked up in the United States for all three major nutrients-potash, phosphates (DAP) and nitrogen (urea)," she observed.

Current crop prices in the United States and abroad support fertilizer application, Mohr suggested, adding the three crops using the most potash per hectare planted are corn, sugar cane and palm oil. "We view 2010 as a transition year for potash, with dealers restocking modestly given the reduced risk of holding inventories on the way to strong market conditions in 2011," she predicted.

Finally, Mohr said, "Signs continue to point to more than a 30% price increase for premium-grade hard coking coal from Western Canada to Asia, when annual contract negotiations are concluded for FY2010.