Gold is not all that glisters
mining-journal.com
WMS gives you the lowdown on some of the hottest international commodities profiled in this issue
GOLD
CITIGROUP suggests that US$1,000/oz gold could become a reality if a mix of macro and supply/demand forecasts gel sufficiently to send gold soaring beyond its historic ceiling of US$850/oz. Citigroup’s research suggests the metal is entering a new investment-driven phase.
International gold-mining production is forecast to increase by around 2% in 2007 to 2,530 t, according to the Australian Bureau of Agricultural and Resource Economics (ABARE). Increased production in China and Indonesia is expected to more than o set a forecast decline in output from South Africa.
In the first half of 2007, production from Freeport’s Grasberg mine in Indonesia more than doubled year on year (to 1.87 Moz) as the operation continued to access ore containing higher grades of gold.
In China, Sino Gold’s Jinfeng mine in Guizhou province commenced production in mid-2007 and is expected to produce 70,000-75,000 oz of gold over the remainder of the year before reaching an annual production rate of 180,000 oz in 2008.
 Next year, world gold production is forecast to increase by 3% to 2,606 t, largely as a result of higher output in Australia, China and the US, and a partial recovery in South Africa’s production. The latter’s gold output has declined substantially over the past decade, primarily as a result of an increase in production costs and a decline in rand-denominated gold prices. Production is expected to pick up from 2008 as projects come onstream to expand existing gold operation.
BMO Capital Markets has increased its 2008 and 2009 gold price forecasts to US$800/oz, as well as raising its long-term forecast to US$600/oz. BMO noted that gold has outperformed most major stock markets, broad base-metal price indices, currencies and bonds so far this year.
In 2008, gold-fabrication consumption is forecast to increase by more than 3% to 3,358 t. This is expected to be underpinned by sustained economic growth and corresponding increases in household incomes in India, the Middle East and China, albeit at a lower rate than in 2007.
However, strong Central Bank sales would almost certainly knock back the gold price. Last year, the Swiss announced an intention to off load 250 t of gold by the end of 2009, of which 137 t was outstanding at the start of this Central Bank Sales Agreement sales year, starting on September 27.
According to Barclays Capital, speculative interest in gold has hit an all-time high and non-commercial positions in the Comex gold market now account for 42% of total futures positions.
Recent gold-positive factors, such as jittery stock markets, a weakening dollar and growing concerns about inflation look likely to persist for some time – that means gold will likely continue trading with an upside bias.
SILVER
 Geographically, just over half of all mined silver comes from the Americas. Peru, Mexico and the US are the first, second and eighthlargest producers, respectively. The thirdbiggest is China, taking Australia’s 2005 spot on the back of dwindling Australian production, according to The Silver Institute’s ‘World Silver Survey 2007’.
Most silver emerges as a by-product of the mining of other metals. Only around 25% of output comes from so-called primary silver mines, where silver is the main source of revenue. This is noteworthy given that the impact of the silver price is most acute on primary production, whereas by-product silver production is largely a function of the price of the other metals with which it is mined.
National Bank Financial, the Canadian investment dealer, has raised its average silver price forecast for 2008 from US$13.50 to US$14.50/oz, and for 2009 from US$12.50/oz to US$14/oz.
PLATINUM
 As WMS went to press, the platinum price was approaching a level of US$1,500/oz as safety-related mine closures and lower than targeted production by majors are expected to stretch the supply deficit. The market will see a larger supply gap than expected next year if safety-related incidents and temporary mine shutdowns continue, such as those at Northam Platinum and Anglo Platinum. The world’s third-largest producer, Lonmin, has already indicated that production will fall short of this year’s targets.
BMO Capital Markets’ 2008 platinum forecast was increased from US$1,225/oz to US$1,350/oz, while the 2009 estimated forecast has been increased from US$1,100/oz to US$1,200/oz. The long-term platinum forecast remains at US$1,000/oz.
URANIUM
According to the World Nuclear Association, there were 439 operable nuclear reactors in October, with a further 33 under construction and 316 planned or proposed.
Since the early 1990s, a large percentage of world uranium demand has been met by secondary supplies, particularly from the Russian Federation. Secondary supplies have been sourced predominantly from the conversion of highly-enriched uranium from dismantled nuclear weapons, government inventories and reprocessing. The supply of uranium from secondary sources is expected to decline marginally in 2007 and 2008.
However, this year’s global uranium-mine production is forecast to rise 9% to 51,000 t U3O8, driven largely by expected higher production in Kazakhstan, Namibia and South Africa, according to ABARE. In 2008, world uranium production is forecast to increase by a further 18% to 60,300 t U3O8 due to increased production in Kazakhstan as a number of uranium mines continue to lift output towards full capacity and new projects commence production.
Uranium stocks have been susceptible to negative news since uranium-oxide prices peaked in late June at US$136/lb to currently stand at about US$80/lb (mid-October).Due to a serious imbalance between supply and demand, Deutsche Bank’s Global Markets Research team in Australia believes the spot price will average US$128/lb in 2008 and US$130/lb in 2009, but then taper to US$95/lb in 2010.
COPPER
 Unlike copper metal, there is no formal exchange for copper concentrates. Instead, prices are established through negotiations between the smelter and mine. The mines are paid for a portion of the copper metal and any by-products, and penalised for impurities contained in the concentrate.
The copper market continues to be affected by a number of different and conflicting themes. Demand conditions remain weak in the US, while in China demand (for imports of cathode) continues to ease, reflecting over-buying earlier in the year. However, given the supply disruptions against a background of low inventories, Natixis Commodity Markets raised its 2007 price forecast to US$7,200/t from an earlier estimate of US$6,750/t. In line with this, Natixis has also raised its 2008 forecast price to US$6,500/t, from US$5,750/t. In terms of the supply/demand balance, 25,000 t de cit is projected in 2007, moving to a 160,000 t surplus in 2008.
Credit Suisse has analysed 66 copper projects, currently under way or planned, with the potential to collectively produce an additional 8 Mt of copper by 2015. The bank reports that “a significant spike” in 2008 prices is still possible and that prices could exceed US$3/lb as a result of undersupply.
Over the past ten years, annual demand for copper has increased on average by 3.9%. Forecasts for 2008 indicate that supply will only feed an additional 2.3% into the market. Over the longer term, Credit Suisse says the demand/supply ratio will reverse and annual global copper demand will need to increase by over 4.3% to maintain a stable market. That assumes, however, that all 66 of the projects reviewed will come in on schedule.
NICKEL
 Since nickel prices began to increase in 2003, attempts have been made by some consumers to move away from using nickel and stainless steel containing nickel. In some applications, such as pipes and fittings, other materials such as plastics or galvanised steel can be substituted. In applications where this is not possible, including kitchenware, stainless steel with low or no nickel content may be used. A number of stainless steel producers have introduced new grades of this year.
Natixis Commodity Markets projects a surplus of 30,000 t in 2007. It sees this surplus being eroded next year as off-take from the stainless steel market recovers, and projects a 5,000 t deficit. Despite the recent cuts in stainless steel output, many of the factors that have supported nickel’s bull market – strong growth in stainless steel output and capacity constraints limiting primary nickel output – remain in place.
There are signs that the Chinese government is introducing measures to curb the growth in nickel pig-iron output. In 2008, ‘conventional’ smelting capacity will not be sufficient to fill the gap. In the short-term, prices could rally further to lead to an average of US$35,000/t in 2007. Next year, although the supply side will be tight, substitution may put the market under pressure and Natixis is projecting an average of US$27,000/t in 2008.
According to ABARE, in 2008 nickel prices are forecast to average around US$28,000/t, 25% lower than in 2007. The lower nickel price reflects an increase in world stocks as growth in supply exceeds demand growth. However, nickel prices are forecast to remain high as demand for stainless steel stays strong.
ZINC
 According to the International Lead and Zinc Study Group, increases in global demand for refined zinc metal of 3% to 11.38 Mt in 2007, and 5.1% to 11.96 Mt in 2008, will be due to the expected further, robust growth in China of 8.8% in 2007 and 12.1% in 2008. Global zinc mine output is forecast to increase by 7.4% to 11.18 Mt in 2007 and by 9.5% to 12.24 Mt in 2008.
The recently-opened San Cristobal mine will substantially boost production in Bolivia. Australian and Canadian output is also predicted to rise sharply, influenced by the commissioning of a number of mines in 2007 and 2008. Anticipated rises in Peru will be principally the result of increases at the Antamina mine and opening of Minera Milpo’s Cerro Lindo operation.
Global refined zinc-metal production is expected to increase by 5.9% to 11.32 Mt in 2007 and by 7.8% to 12.2 Mt in 2008. The largest rises will be in China and India, where Hindustan Zinc’s second 170,000 t/y capacity plant at Chanderiya is to open at the end of 2007.
Natixis sees the recent downtrend in LME inventories as temporary, and it believes the inflated level of treatment charges and associated surge in mine output will soon be reflected in higher, refined output and an increase to LME inventories.
As such, Natixis views the upside in the zinc market as limited. It expects the market to be in a marginal deficit of 17,000 t this year, moving to a 200,000 t surplus in 2008. For 2007, it projects a price average of US$3,100/t, and US$2,300/t for 2008.
Goldman Sachs JBWere said China’s trade in refined zinc was essentially balanced in September, but concentrate imports reached a new monthly record of 294,400 t. The surge in raw material imports in recent months has, of course, driven refined-zinc production higher. Elsewhere, zinc supply is experiencing a number of disruptions, although these seem to be of much less significance than in the copper market because (a) the zinc concentrates market is much better supplied than copper, and (b) most of the zinc disruptions have been on a relatively small scale. |
