I've been thinking a lot about base metals lately, in particular copper and zinc.
Part of my investment strategy is to find opportunities in the mining sector where commodities prices will increase longer term, to try to get in at or near the bottom and enjoy the climb.
Coal and iron ore appear to be out, at least in the short term. An oversupply of both steelmaking ingredients, due in part to the economic slowdown in China, has caused the price of each to sink even deeper in recent months. Gold and silver have also been hard hit the past two years. Fewer investors are turning to those precious metals as a safe haven, particularly as the American economy and the US currency stage a steady recovery.
The only bright spots, according to recent forecasts, appear to be in base metals such as copper and zinc.
Experts at TD Securities say the European Central Bank's recent stimulus program and further easing in Chinese monetary policy could help boost demand for these industrial metals. They also throw nickel in the mix.
"Nickel and zinc have the most upside potential, as both markets are expected to become quite tight over the forecast horizon," TD states in a recent report.
Copper still has some catching up to do, as the metal remains in a surplus this year, but some are calling for shortages in 2017 and beyond.
Vancouver-based Teck Resources (TSX:TCK.B,NYSE:TCK), Canada's largest diversified resource company, said recently it's looking to buy a copper mine, betting on copper to be in a large production deficit by 2017.
"We have a lot of faith that the copper market's going into deficit and that it's going to be a very high return period for several years," Teck CEO Don Lindsay told Bloomberg recently.
Zinc is one of the most widely consumed metals in the world, up there with iron, aluminum and copper. It's used mainly to galvanize steel, is combined with copper and other metals to form materials used in cars and household fixtures and is also important for health in that it's a necessary element for the growth and development of humans, animals and plants.
That's your zinc lesson. But what about zinc production and how you can make money from it? There have been many reports lately that zinc mines around the world are slowing, being tapped out, which could create a supply shortage and in turn lead to price increases.
Examples include the closure of Xstrata zinc mines in Canada in recent years, the Lisheen mine in Ireland and the Century zinc mine in Australia, which is set to close later this year. TD states in recent note that the closure of the Century mine could be a "significant catalyst" that could drive zinc prices higher in the near future. Its long-term forecast for zinc is an average of US$1.10 per pound, which is up from around 99 cents today. That should help put a floor on zinc prices, and give stocks a boost.
"Zinc, like all metals, is facing uncertainty about demand given the slowdown in China," notes Caroline Bain, senior commodities economist at Capital Economics, in a recent report. "But we think that the possibility of further targeted stimulus by the authorities has risen and feel confident that the economy will avoid a hard landing."
Adds Bain, "it is the supply outlook that differentiates zinc from some of the other metals. The deficit in the market—even with relatively subdued demand forecasts—is likely to widen owing to mine closures."
Copper is another metal that's gaining more attention from investors.
In a 2015-16 metal outlook released earlier this year, TD analyst Greg Barnes notes that copper has the "most attractive longer-term fundamentals" even though he sees "modest" surpluses this year and next.
While he lowered his copper price forecast at the start of the year to US$2.86 per pound from $3.10 per pound, he projects that global demand will grow nearly 4 percent.
Chinese demand remains the wild card given slowing economic growth compared to years past, but government stimulus is expected to be supportive of the industrial metal. That includes money spent expanding its infrastructure base and power grid to support a growing population.
"Copper supply growth still faces difficulties: In our view, the copper market is not facing a wall of supply over the next two years," TD states in its research. It also cites production cuts, some of which were the result of bad weather, and protests at major mines around the world.
TD's long-term copper forecast is US$3 per pound, with some spikes above that between now and 2020. That's up from around $2.65 per pound today.
"Our higher medium-term price reflects our view that prices will strengthen over the next 3–5 years as modest surpluses evaporate and the market returns to deficit," TD notes.
Capital Economics' Bain notes that investor sentiment towards copper turned negative at the end of last year and cites short covering as one potential reason.
"There are tentative signs that sentiment is starting to turn," Bain states while calling for prices to rebound in 2015.
She also notes that copper prices have been "relatively resilient" when taking into consideration the rising U.S. dollar.
Bain also forecasts mine supply growth to be "markedly lower" than the 5 to 8 percent forecast by many of her peers.
"We think that supply will grow only modestly this year and that demand will pick up in Q2 as purchases can no longer be delayed given the seasonal pick-up in industrial activity in China. These developments should provide the catalyst for improving investor sentiment," Bain points out.
So, as you can see, it's not all doom and gloom for the mining sector in the months and years to come. There may be several buying opportunities for investors. The key now is picking which companies are best positioned to capitalize on that growth.
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