Investment Summary –
Cautious Optimism Or
Supercycle Redux?
From 2003 until mid-2008, the world enjoyed a period of geosynchronous
economic expansion that thrust the global base metal industry into the
investment spotlight; the “commodity supercycle” was born. Base metal prices
continually outpaced expectations eventually reaching all-time record highs and
an ongoing drive for large-scale M&A transactions emerged reshaping the
Canadian mining landscape.
Core investment themes of the base metal “supercycle” were that: 1) China,
India and other emerging economies were industrializing on a scale that had not
been observed since the end of the Second World War and a sustained period of
insatiable appetite for metal was underway; and 2) the industry was suffering
from a prolonged period of underinvestment and was inadequately positioned to
mount a meaningful supply response.
The onset of the global financial crisis in 2008 led to a precipitous drop in metal
prices, large-scale production cutbacks and the deferral of new supply, events
that appeared to be highly unlikely, if not impossible, only six months earlier.
Today, with major western world economies continuing to struggle, is the base
metals renaissance over or does the “supercycle” thesis still have legs?
Supercycle Argument Still Holds, But Some
Things Have Changed
We continue to believe the industrialization processes within China, India and
other emerging economies are largely intact. The motivation of these
governments and their populace remains strongly resolved towards ongoing
economic advancement. However, with western world economies currently
retrenching, we believe aggregate global metal demand will only recover to
observed 2008 levels in 2010. We expect base metals demand to grow in the
range of 4.0%-5.6% in 2010, levels we believe to be well below past peak
growth rates.
In terms of the industry’s ability to bring on new supply, our view is very metal
dependent. We continue to see fundamental issues that constrain the capacity to
add meaningful new supply of copper, metallurgical coal and in the near term,
zinc. Conversely, we see that the nickel market, which was critically tight in
2007, has been able to increase supply to a degree that makes a market deficit
unlikely for the foreseeable future. We forecast an average growth in metal
supply in the range of 4% in 2010, except for nickel, which we expect could
increase by 9%.
That said, the impact of accelerated Chinese buying and stockpiling in 2009, the
renewed influence of capital markets participants and seemingly very well
supplied markets at a time when stimulus funds are beginning to recede have
created legitimate cause for concern among investors regarding future metal
consumption rates and price levels.