Friday, November 9, 2012

Scotiabank sees 2013 revival on China stimulus and political change

By: Simon Rees

Scotiabank believes 2013 will mark a measured revival across metals commodities, with Chinese stimulus and economic performance pushing global direction, Scotiabank’s VP economics and commodity market specialist Patricia Mohr told delegates at the Mine Latin America conference on November 7.

“Between April 2011 and July of this year there has been a 19% drop in overall commodity prices,” Mohr said. “But I’m glad to say that in August-September there was a nice rebound on several supply developments. [And] I’m pleased to say that China’s Purchasing Manager Index has started to move up again,” she said.

Mohr explained why the outlook was now brighter. “The most recent indicators show that things will pick up again. I think China’s gross domestic product (GDP), which had slowed through Q3 to about 7.4% year-on-year, will edge up in the fourth quarter,” she said. “We see things then picking up in 2013 to about 8% and, for 2014, about 8.3%.”

“We’ve also noticed that China’s central government would like to wean the country away from central planning. They’ve left the economy to make its own adjustments this year, which is why they’ve not been as aggressive in kick starting the economy after the slowdown,” she said.

Of particular importance to China’s future economic development is the change in political leadership, with Xi Jinping and Li Keqiang set to take over the leadership mantle. “I view this as equally important to the mining industry as the outcome of the US election was. We won’t know for a while what effects the political changeover will have for the Chinese economy, although we know from past experience that new leadership heralds enormous change.”

“In the short-term, we think there will be a considerable degree of policy continuity with the five-year plan that was unveiled in March 2011 that will be in place until 2015,” Mohr later told Mining Weekly Online. “[But] there will be various reform policies put in place. Probably they will emphasise the development of China’s financial industry and various service sectors, such as insurance. There’ll also be social objectives, such as improved medical care and pensions,” she added.

New infrastructure projects will continue to spur Chinese growth. “In September, a new infrastructure development programme for China was announced. About $160-billion will be spent on subways, roads, ports and navigation channels etc. This will boost GDP by about 2% over the next four years. We’re already beginning to see the effects of this in the steel and cement sectors,” Mohr said in her speech.

But Mohr sounded a note of caution about local government debt levels. “Back in November 2008, when China implemented a massive infrastructure spending programme, much of this was financed by local government, which now has less room to manoeuvre [because of debt incurred],” she later told Mining Weekly Online. “This debt has come down over the past year, but it remains quite high … so while many local governments have announced huge potential infrastructure projects, we’re not sure the financial resources are available to go through with a lot of them.”

Mohr’s speech then moved away from China by discussing the US. She outlined slowing growth into 2013. “We see the US economy picking up a little to 2.1% in 2012, but then slowing again into 2013 as attempts are made to tackle the fiscal situation and the high levels of government debt. We will then see, perhaps, a slow pick-up in the second half of 2013 going into 2014,” she said.

Mohr also highlighted some support signs, underlining the importance of autos. “There’s been a nice recovery in vehicle production in the USA, Canada and Mexico. In fact, the auto assembly figure for North America is up 20% in volume terms. This is good for metal demand and we expect things to improve next year, although more modestly.”

Turning her attention to specific industrial metals, Mohr highlighted the copper’s robustness. “Copper will remain exceptionally strong; stronger than many of us would have thought even a few months ago … In late 2012, copper remains in a supply-side deficit. Although some new mine expansion will come on stream next year, there’s a lot of scepticism around the world about how big that new supply will be. Also several projects in the Democratic Republic of Congo might not come on stream quite as quickly as expected.”

“Zinc has also been a surprising story this year. Refined zinc has shifted from a surplus into a deficit. But the reason has not been a positive one; it’s because Chinese zinc smelters have recently shuttered a lot of capacity on low treatment charges and poor profitability,” she said. “Miners will probably have to accept higher treatment charges for moving their concentrates into China. But in the second half of this decade, I suspect zinc will be a winner because of global mine depletion.”

Iron-ore’s run may face greater pressure as more competitive operations come on stream and increased supply weighs on prices. “Iron-ore has had quite a run in recent years. It’s going to be a more competitive environment over the next five years because of a lot of new mine supply is coming on stream. So I think they’ll be a modest drop in the coming years for iron-ore prices,” she said.

On gold, Mohr was fairly bullish, highlighting several support factors for the yellow metal, including various stimulus measures, such as the US Fed’s third phase of quantitative easing and the potential for liquidity injection in Europe. “For 2013, I have a conservative forecast for gold at $1 700. But you could quite easily see $1 800,” she said.

“It’s also noteworthy that when the Basel III banking regulations come into force in January 2013 that gold will be again reclassified as tier-one capital for bank holdings. That means it will return to being a full-fledged financial asset,” she added.

Edited by: Henry Lazenby