Miners set for 'obscene profits' in 2005 - Merrill
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Prices of commodities that China needs to fuel its rapidly expanding economy will probably increase sharply in 2005 as demand outstrips supply for another year, Merrill Lynch fund manager Evy Hambro said on Wednesday.
Noting the strong performance of commodities in 2004, particularly base metals such as nickel and copper, Hambro told reporters at a briefing in Hong Kong that he expected continued strong demand from China to support prices.
"The key thing though... is what is happening in the mining industry. Supply remains constrained," said Hambro, fund manager for Merrill Lynch International Investment Funds's (MLIIF) World Mining Fund, and its World Gold Fund.
"The mining industry is unable to grow its supply fast enough in order to be able to match demand, and as a result the deficits that are in place today will remain in place in 2005 and we're going to have a very strong environment for commodity prices going forward."
Hambro said that producers of bulk commodities such as iron ore and coking coal -- used for steel production -- and coal for power plants were on course for bumper profits in 2005.
"Things like iron ore, coal, industrial minerals, they're all having a very very strong pricing environment at the moment," said Hambro. "We're going to see some exceptional price increases for most of these commodiites during the annual price negotiations that take place at the beginning of each year." Citing coking coal as an example, Hambro said that while prices had settled at $58 per tonne last year, the price had soared above $100 a tonne in recent weeks, with one cargo for a Brazilian customer reportedly priced at $137 per tonne.
"We're talking about dramatic price increases for this commodity," said Hambro.
"The companies that produce these materials will make obscene amounts of money next year, obscene profits and obscene cashflow." Key holdings in MLIIF's World Mining Fund, which has nearly $1.7 billion under management, include the world's largest diversified miner, BHP Billiton, Brazil's CVRD and global miner Rio Tinto Ltd.
Hambro said Merrill was confident that despite recent volatility in metal prices, mining companies would see record profits in the year ahead.
"The record results that have been released by the major mining companies in the first half of 2004 will undoubtedly be surpassed in the second half of the year. Looking forward, we believe that the sector is set to break earnings and cash flow records again in 2005," said Hambro.
"Investors who believe, as we do, in the long term positive outlook should look through the short term shifts in sentiment and take advantage of share price weakness to build positions." Gold prices, which have soared in 2004 to more than $450 an ounce from a price of about $400 12 months ago, are also expected to provide strong support as investors buy the yellow metal as a hedge against the falling U.S. dollar and as a diversification play.
Hambro said the bull market in gold should continue because of shortages among miners and central bank gold sales. Gold prices have increased more than 50 percent since 1999.
"We've actually got a gold market now that's in deficit," said Hambro.
"Gold mine supply continues to decline, central bank sales are dramatically lower this year versus last year and central bankers are making hints that they might try to increase some of their gold holdings." If those factors alone weren't enough to drive gold prices higher, Hambro said, China's demand for gold is expected to increase three-fold over the next three years, to 600 tonnes per year from 200 tonnes.
"That 400 tonnes of additional supply is about the same amount of gold as South Africa produces," said Hambro.
South Africa is the world's largest gold producer.
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