PwC Predicts A Turnaround In Metals Prices, But Warns Not To Expect Record Prices Any Time Soon
07 Jan 2014 by Ryan Jackson in Vancouver
minesite.com
After a year of depressed commodity prices and difficult conditions for miners, PricewaterhouseCoopers has conducted its annual survey of the industry to get an idea of where mining executives believe prices are heading and how they intend to adjust their strategies in light of their expectations for 2014 and beyond.
Gold had a terrible year in 2013. It started 2013 at just below US$1,700 an ounce. But by the summer had dropped to around US$1,200 an ounce, where it continued to trade in late December and early January.
The World Gold Council reports that gold demand was down 13 per cent in the third quarter of 2103, driven almost entirely by a drop in investment demand from the ETF market.
As investors began to anticipate an early tapering of US quantitative easing, they steadily started to close out their positions, resulting in nearly 700 tonnes of gold cut out of ETFs by the end of September.
What may be surprising however is that despite its poor performance gold was not the biggest loser in the sector.
That distinction goes to silver which, according to PwC, fell roughly 40 per cent in value over 2013, starting the year at around US$32 per ounce before falling to below US$19 per ounce.
That dramatic reduction in value makes silver the worst performing metal of the year. Silver is both an industrial metal as well as a store of value, but weak global economic performance and lower investment demand contributed to the price deterioration. In addition, PwC notes that excess supply put a damper on prices last year.
Still, 53 per cent of participants in PwC’s survey expect the silver price to increase over the next 12 months, while 38 per cent expect prices to remain at current levels. Only 9 per cent predict further price deterioration.
In contrast, the report highlights copper’s relative good performance over the period, despite problems with oversupply and uncertainty surrounding global economic growth.
Earlier in the year oversupply was cited as a major concern, but the rapid doubling of inventories on the LME subsided just as quickly in the second half of 2013.
In terms of price, the red metal began 2013 at US$3.70 per pound and traded down from that at around US$3.30 in late December.
That decline isn’t bad though, when compared to the dramatic losses posted by silver and gold. Looking forward, while the massive growth in China which has fuelled demand for copper in recent years has slowed, continued growth in Asia will continue to contribute to strong consumption.
In particular, the growth of China’s domestic consumer market could provide additional demand going forward.
The majority of copper mining executives polled by PwC, some 62 per cent, believe that prices will remain steady in 2014, while 21 per cent expect an increase and 17 per cent predict further price erosion.
Participants from gold companies tempered their optimism considerably when compared to 2012. Last year 88 per cent of participants expected to see the gold price rise in the following 12 months, only 47 expected to see a price increase in 2014.
This year, seven per cent responded that they expect the price to fall lower in 2014 while 46 per cent expect a relatively stable price in the year ahead.
Last year participants expected the long term gold price to trade at around US$1,400 per ounce, but this year’s survey projects an average expected gold price of US$1,369 per ounce. That’s only two per cent lower than the figure quoted a year ago.
ETFs made up the majority of the fall in demand for gold, but the opposite was true for other key commodity ETFs in 2013, according to PwC.
While commodity exchange traded products (ETPs) saw a US$2.3 billion outflow in the third quarter, the lion’s share was in gold ETPs. Excluding gold, global commodity ETPs saw a US$1.9 billion inflow during the third quarter which is a substantial improvement when compared to the US$19.6 billion outflow logged in the second quarter of 2013.
The results signal an improvement in investor confidence that industrial growth is on the uptick which could materialize in the commodity sector at large in 2014.
Leading the charge were silver ETPs, which performed strongly as investors brought US$706 million in net inflows into the market after seeing the price decline more than 50 per cent from its peak levels.
Many investors see the metal as a good value opportunity and silver’s double duty as an industrial metal as well as a store of value brings diverse investors to the market.
Still, the ETP outflows logged in the third quarter, combined with gold’s poor performance, put a damper on the industry overall.
In some ways this was surprising, given the improved outlook for China in late 2013. The writers at PwC chalk it up to the expected surpluses of industrial metals which led investors to prefer platinum, silver, and oil over copper and nickel.
While 2013 was certainly one of the worst years for metals prices in recent years, the first week of 2014 has seen some optimism return to the industry.
Silver for March delivery has lead the charge, gaining 3.6 per cent on the COMEX in the first week of the year. Having gained US70 cents, March silver is trading at US$20.07 per ounce.
Meanwhile, gold futures performed well gaining more than US$20 so far this year on the COMEX. Gold for February delivery appreciated by 1.8 per cent to US$1,223.80 an ounce after falling 28 per cent over 2013.
So, with pundits predicting that the rapid exit from gold ETFs in 2013 is complete and with the current price supported by physical demand, this positive first week of trading could be a sign of things to come.
The tempered optimism illustrated by PwC’s survey shows that while industry insiders may not be as bullish as in previous years, they do believe that current prices can be maintained or improved upon in 2014.
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