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Week of October 31, 2010
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Mining News: Forecast: Metals bulls will run to 2011

Morgan Stanley foresees fiat currency worries driving investors toward gold, silver; emerging markets demanding more base metals

Shane Lasley

Mining News

Precious and base metals alike enjoyed significant price gains over the past year, a bull run that is expected to carry into 2011, according to the Morgan Stanley Global Metals and Mining Team.

Safe-haven investments, driven by worries of a softening U.S. dollar and a spreading of the European debt crisis, are expected to keep investors buying large quantities of gold and silver. At the same time, base metals are expected to be nudged by “significant growth in emerging countries,” especially China and India, according to Morgan Stanley researchers.

“Accelerating weakness in U.S. currency, driven by fears of renewed quantitative easing to confront sluggish U.S. growth, is proving to be a boon to commodity markets, especially as growth risks from fiscal policy normalization, the European sovereign debt crisis, policy tightening in China and high unemployment in the USA and Europe persist,” the company wrote in its Global Metals Playbook: 4Q10.

Quantitative easing is a policy by which a central bank such as the U.S. Federal Reserve creates more money ex nihilo (“out of nothing”) by crediting its own account. It can then use these funds to buy investments like government bonds from financial firms such as banks, insurance companies and pension funds, in a process known as “monetizing the debt.”

Gold, silver, palladium; gains expected

Spurred by increased investment demand, prices of gold and silver are expected to increase by nearly 10 percent in 2011, according the Morgan Stanley Global Metals and Mining Team. Increased car sales are expected to drive similar gains in the price of palladium.

“Fiat currency concerns have re-appeared as the U.S. Federal Reserve contemplates renewed QE (quantitative easing) to confront sluggish growth and persistently high levels of unemployment. This development, with associated downside risk to the U.S. dollar, is likely to underpin continued growth in investment demand for gold and silver,” the researchers said.

Gold prices, which averaged US$1,043 per ounce in October 2009, have surged about 30 percent over the past year, averaging US$1,347 during October of this year (through Oct. 18).

Morgan Stanley’s base case gold price forecast for 2011 is an average of US$1,315 ounce, a 9.3 percent increase over the expected US$1,203 an ounce gold price average for 2010, when the balance of the year is tallied. The financial advisor’s bear scenario, at US$1,249 per ounce of gold, beats the 2010 average and the company believes the average gold price next year could go as high as US$1,512 per ounce.

Silver outperformed gold in 2010, a trend that the financial firm foresees continuing into 2011. The bank said demand for the metal as a safe-haven investment has offset declines in other uses such as photography, electronics and jewelry. The “poor man’s gold” has gained 36 percent over the past year, and its average price in 2011 is expected to be 10 percent higher than this year.

“On the back of our upgrade to gold price forecasts, we have also lifted our average silver price expectations, to US$18.47/oz in 2010 and US$20.23/oz in 2011. At the same time, we are forecasting the gold/silver ratio will normalize to the long-term level of 63:1, meaning a slight outperformance versus gold over the next two years,” Morgan Stanley researchers wrote.

The global financial services firm said the recovery in demand for automobiles bodes well for platinum group metals, which are commonly used in the catalytic convertors to reduce exhaust emissions.

The company foresees platinum itself averaging around US$1,624 per ounce in 2011, about the same as prices in 2010, but its expects palladium to climb to around US$541 per ounce, a 9.7 percent increase over the 2010 expected average selling price of US$493 per ounce.

“Demand for palladium from autocatalytic converters is likely to outpace platinum demand as the economic recovery continues, since vehicle production growth is stronger in palladium-intensive regions such as China, the US, and other emerging markets,” the researchers wrote.

Copper, nickel favored in 2011

Lead by copper and nickel, base metal prices are also expected to climb over the next year.

“Following the recent correction, we are positive towards base metals and have strengthened our price forecast profile through 2012. This reflects our expectation that modest growth and continued supply constraints will be reflected in falling inventories and strengthening prices. While we are cautious on those metals with a forecast market surplus over the 2010-2012 period (aluminum, lead and zinc), we continue to prefer the deficit markets of copper, nickel and tin,” the metals researchers wrote.

Over the past year, copper prices have climbed more than 30 percent, topping US$3.80 a pound in October. When the balance of 2010 is tallied, Morgan Stanley estimates the year’s price average will be around US$3.31 per pound. Dwindling London Metal Exchange stockpiles and lessening global production has prompted the financier to call for a US$3.60 average copper price for 2011, or 8.8 percent higher than 2010.

“LME stocks have fallen every month since February, including a rare drop in August, a month when inventory almost always rises. Shanghai exchange stocks ended the quarter at their lowest level of the year. While the sustained recovery in global demand contributed to this trend, tighter market conditions are primarily a function of supply constraints,” the financial advisor explained. “Production downgrades from some of the world’s highest-profile operators (BHP Billiton, Freeport McMoRan, Kazakhmys, Antofagasta among others) have accelerated an already extraordinarily tight concentrate market.”

Morgan Stanley agrees with a growing number of copper analysts who are calling for a deficit in copper supply in the coming months.

“In hindsight, China’s massive imports during 2009 not only signaled strong demand there but also left the rest of the market worryingly short of metal, particularly at a time when many consumers around the world have been operating at threadbare inventory levels,” the firm said.

At 36 percent, nickel posted the strongest base metal gains over the past year. As of Oct. 18, the stainless steel ingredient was selling for US$10.80/lb.

Morgan Stanley forecasts the average nickel price to be US$10.75/lb. in 2011, an 8.6 percent increase from the US$9.90/lb expected average price for 2010.

“Nickel remains one of our most preferred exposures in the base metals complex, given our expectations for a tightly balanced market for the remainder of this year and into next,” the bank wrote.

Zinc and lead only made modest price gains over the past year, a trend Morgan Stanley foresees continuing until manufacturers start digging into record surplus stockpiles.

The financial advisor’s metals and mining team expects zinc prices to average US99 cents/lb in 2011, up 3.1 percent from the US96 cent/lb levels for 2010, while lead is expected to fetch US97 cents/lb, 2.1 percent higher than the 2010 average.

“While we expect these conditions to underpin the global market over the next year, we think consumption will finally catch up to production by 2012,” the bank commented on oversupplied zinc markets.

Deficits to drive coal prices

Coking coal could prove to be the shiniest mineral in 2011. Morgan Stanley foresees a 23.6 percent increase in the premium coal needed to make steel. The financial firm expects the metallurgical coal to average US$236 next year, compared to the US$191 average in 2010.

The advisor said steel output in China and India is expect to rice from 623 million tons in 2009 to 908 million tons in 2015.

“Infrastructure problems, especially in Australia, and limited supplies of premium hard coking coal, at a time when new large-scale blast furnaces require greater quantities of this material, will intensify pressure further in an already tight market. We are forecasting deficit seaborne markets until 2015,” said the researchers

China and India demand are expected to drive strong growth in the seaborne thermal coal market, increasing supply deficits and prices. Over the next year thermal coal prices are expected to climb 7.1 percent from the US$98 per ton average for this year to a US$105 per ton average for next year.

“By 2015, growth in Indian thermal power generation capacity should raise import volumes close to 115Mt annually, a level that would match the anticipated size of the Chinese and Japanese markets at that time. Because of these developments and continued infrastructure-related supply constraints in the Asia/Pacific market, we are forecasting annual deficits in the seaborne market out to 2014,” Morgan Stanley advises.

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