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Metal Prices Finally Supportive Again

Sustained strength in metal prices during the past year is giving way to growing confidence that now is the time to return to investment in the mining industry. Prices for most of Latin America's key metals - including copper, gold and zinc - will start off the New Year higher than they were a year ago. Iron ore is the exception, though it remains much higher than the lows registered two years ago.

Optimism is high. Sixty percent of early respondents to BNamericas' Mining Survey 2018, the final results of which will be published at the end of December, said copper prices will trend upward in the year ahead. This compares to a year ago when only 22% expected increases.

The iron ore outlook is less jubilant but still more optimistic than last year with 35% of survey respondents expecting prices to rise versus 14% a year ago, while about half say gold prices will increase in the year ahead, a similar result to last year's survey.

But for 2018, more important even than continued price increases in determining a return to growth is price consolidation. In that sense, copper is stealing the show. "If you ask, what is the best commodity to bet on, I would say copper. It may be a very boring and straightforward metal but I think it has a very bright future ahead," says Andor Lips, Commodity Discovery Fund manager.

Higher prices will be mainly the result of a growing supply crunch as Chinese demand remains strong and mine supply fails to grow due to the deferral of projects in the last few years and a lack of new discoveries. But while many agree that copper is entering a genuine new cycle of strong prices, there is also consensus that it will not match the highs seen several years ago.

"The commodities super cycle that we saw largely driven by China is, by everyone's measure, not expected to return. So while we hope to see further recovery in prices that would underpin development of projects, we certainly would not expect a return to the levels we were seeing a number of years ago," says Lance Crist, global head of natural resources and the International Finance Corporation (IFC).

"Having said that, we do generally look, given our focus on emerging markets, and see a reasonably positive outlook," he adds.

As for gold, prices will be supported by interest rates, US dollar movements and geopolitical threats. Consultancy CPM Group believes prices will rise modestly in the near term and could see a sharper increase on the 3-5-year horizon, said president Jeffrey Christian during a recent webcast.

Higher metal prices have led to growing cash flow for producers and increased investor interest in the sector that is supporting higher share prices and more free-flowing financing. For majors, this means a stronger position to acquire assets or make development decisions. For the junior sector, equity financing has risen dramatically over the last year and is likely to continue strong, allowing companies to reactivate exploration.

The greater market confidence is likely to lead investors to a greater acceptance of the social and political risks to mining activity that characterize the operating environments of the different Latin American countries, which in some cases could heighten. Elections are scheduled in four major markets - Chile, Colombia, Mexico and Brazil - while community challenges are on the rise in Colombia and as important as ever in Peru. Ecuador and Argentina offer rising opportunity as jurisdictions working feverishly to improve the legal environment for mining investment.

Cover photo: Ministro Hales copper mine. Credit: Codelco

Graph: LatAm GDP Growth Forecasts
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Table: 2018 Metal Price Forecasts

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