Scotiabank says a strong rebound in U.S. auto assemblies is likely to support base metal premiums in the country

Author: Dorothy Kosich
Posted: Thursday , 29 Mar 2012

RENO (MINEWEB) -

Scotiabank economist, Patricia Mohr, predicted that zinc will become the "big base metal play," as a strong rebound in U.S. auto assemblies supports base metal premiums in the U.S.

In the March 27th edition of the Scotiabank Commodity Price Index, Mohr observed, "A strong rally in base metal prices and firmer gold led the Metal & Minerals Index higher in February."

"LME copper prices spiked to US$3.93 per pound last month-leading other base metals higher-as some of the late-2011 gloom on the global economic outlook lifted," she said. "Sentiment has improved alongside firmer U.S. economic indicators on employment, consumer confidence and auto assemblies and economic monetary policy."

Although Mohr noted copper prices retreated, "we remain optimistic that China will achieve a ‘soft landing' with GDP growth of 8.6% in 2012 and 8.9% in 2013."

In her analysis, Mohr observed that spot potash prices eased from US$500 per tonne in January to US$495 in February, "but remained well above US$393 a year ago."

Meanwhile, the Indian government, under budgetary constraints, has cut the potash subsidiary from $327 per tonne for 2011-12 to $294 for 2012-13. "These developments have triggered temporary production cuts by Potash Corp and Mosaic in Western Canada to bring supply into line with lower demand," said Mohr.

However, Mohr observed that Canpotex and the Belarusian Potash Company have just agreed on new contracts with Chinese buyers for the second quarter of 2012 at US$470 per tonne cfr, unchanged from a year ago.

"The recent rebound in soybean, canola and palm oil prices in Malaysia/Indonesia and ongoing strength in corn prices-all requiring large amounts of potash per hectare planted-has improved farm economics and bodes well for solid fertilizer application in North America, Southeast Asia and Brazil, as 2012 unfolds," she said.

In her analysis, Mohr observed that LME zinc prices rose from 90-cents per pound to 03-cents in February, before dropping to a still lucrative 90-cents in late March.

"Zinc may represent the next big base metal play," Mohr advised. "Zinc will shift into ‘deficit' (at latest by 2014) due to ongoing demand growth in the face of significant global mine depletion in mid-decade."

"In 2013, the closure of the Brunswick mine in Canada, Century in Australia and Vedanta's Lisheen mine in Ireland will shift sentiment towards zinc, with prices rallying in anticipation of tightening supplies," she forecast. "In the second half of this decade, zinc demand will be boosted by a recovery in G7 construction activity, particularly in the USA, China could start to use more galvanized steel in the underbody of a car."

"A merged Glencore/Xstrata would be the largest zinc mining company in the world, with a huge 25% share of world mine output (outside China)," Mohr added,

In the meantime, base metals premiums over LME cash in the U.S. Midwest are also firm, Mohr observed, with the ‘Platts U.S. aluminum premium' hitting a 10-month high of $8.75 cents per pound in mid-March. "Aside from lengthy delays in getting metal out of the LME warehouse in Detroit and lucrative warehousing deals, this strength likely reflects a significant recovery in U.S. auto assemblies, scheduled to reach 10.5 million units in 2012:Q2-a level not seen since mid-2007. Consumers and business are replacing an aging fleet, with the average age of vehicles on U.S. roads now at a record of nearly 11 years, up from a normal 9."

Mohr noted that spot uranium prices remain at a low ebb of US$51 per pound and base term-contract prices are US$60. "On a more positive note, China has completed drafting its new nuclear safety guidelines, spurred by the Fukushima-Daiichi event in Japan," she said. "This should allow a resumption of the approval process and actual construction of new projects this year. China has 15 nuclear reactors in operation and is in the process of building at least 25, with 50 more planned."

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=148391&sn=Detail&pid=102055