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Commodities likely to rally again in Autumn - Scotiabank

While investor interest in commodities and China's demand may taper off in late summer, Scotiabank economist Patricia Mohr suggested Wednesday prices will likely rally again in the Fall.

Mohr advised three key developments will cause prices to rally:

1) The Asian tigers are likely to lead word economic recovery, with larger fiscal stimulus programs than in the G-7 and more potential for domestic spending (i.e. npn-export led expansion); 

2) The reflation trade-investment managers and hedge funds positioning portfolios to take advantage of rising commodity prices and potential inflation as the world economy reflates over the next two years. Mohr noted that price targets for Canadian mining equities "are already being boosted to mid-cycle levels." 

3) A growing interest in ‘hard assets' rather than ‘paper' currencies or U.S. treasury bonds by China and sovereign wealth funds, "as evidenced by China's huge direct investment in Australian mines and interest by Asian utilities (South Korea, Japan and possibly China) in locking up guaranteed supplies of uranium through equity investment in Canadian mines."

Mohr noted that Scotiabank's Metal & Mineral Index lost significant ground last month, as contract prices for hard coking coal were adjusted down "and investors shifted away from ‘safe-haven' precious metals, more than offsetting another strong rally in base metals."

Meanwhile, LME copper prices grabbed the headlines again by climbing to almost $2 in April. Despite depressed G7 demand, Mohr said LME zinc prices "have also been boosted by buying by China's State Reserve Bureau (159,000tonnes to date, with a potential  for 500,000 tonnes), programs by several provinces in China to support domestic mines & smelters (in Hunan, Shaanxi and potentially Chengzhou) and the usually rapid, pro-active shutdown of global smelters (as many as twenty)."

"Though not as important as the stocking in China, the ‘reflation trade' has probably also contributed to stronger exchange-traded base metal prices," Mohr added.

In her analysis, Mohr said spot uranium prices had snapped back to US$51min mid-May. "While ‘uncovered utility requirements' over the next twelve months are low, Asian utilities, a major investment fund and the world's largest uranium miner (Cameco) have been active buyers, anticipating higher prices to come."

"China will start construction on five new reactors this year and is attempting to build a uranium inventory," she added.

Ambitious nuclear reactor programs "are triggering rising interest by Asian utilities in securing long-term guaranteed supplies with miners, often in return for finance (e.g. the recently announced offtake agreement between Denison Mines and the Korea Electric Power Corp (KEPCO) accompanied by equity finance and an arrangement between Uranium One and a Japanese consortium," Mohr said.

While recent uranium prices have covered full break-even costs, Mohr doubts "that recent prices have been high enough to cover the substantial capital costs for major new mine development (e.g. expansion at Olympic Dam), even if unit operating costs are low, given substantial economies of scale."

Mohr also found a recent comment by Kazatomprom (the state nuclear agency of Kazakhstan-a growing source of world supply) revealing. Kazatomprom is expanding its capacity of U₃0₈ production as the agency announced it is entering into a long-term arrangement with the China Guangdong Nuclear Power Holding Co. Ltd.

"Medium-term, we assume that spot uranium prices will climb over US$70-75," she said.

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