Archive for February 27th, 2008
Global Shortage of Commodities Looming
Our peak oil thesis gained some new respect this week as oil prices hit yet another record, the first close over US$100 per barrel. Demand fluctuates, but it is all about supply, and supply concerns this week showed how tight the market really is.
Peak oil has lots of press, but what about peak copper? Peak zinc? Peak gold? Sounds preposterous, but maybe it’s not so
Let’s take a look at some of the issues facing commodity projects today, and give some examples of companies that have already been impacted by them.
Cost overruns: Inflation, equipment shortages, and labour issues have combined to wreak havoc on so many new commodity projects that
Simply put, because of inflation, a commodity project that appeared economical two years ago may no longer be viable. Case in point: Novagold’s (NG/TSX) Galore Creek project in British Columbia.
Costs estimated at $2.5-billion a year or so ago escalated to more than $4-billion. The cost overruns have put the project on hold despite high copper and gold prices. That means an expected 432 million pounds of copper production a year is not going to hit the market anytime soon.
Newmont (NMC/TSX) earlier this month said its Boddington gold mine in Australia was experiencing 77% cost overruns.
Petaquilla’s (PTC/TSX) copper project in Panama is in a similar situation, with costs soaring to $3.5-billion.
Political issues: Too many examples to list here, but ask any mining company based in Ecuador, Venezuela, Mongolia or the Democratic Republic of Congo (DRC) how easy it is to get a project started. It’s practically impossible. For commodity supplies, that’s too bad, because some of the best remaining projects in the world are in some of the most politically unfriendly jurisdictions. Once again, future world supply will not be helped. Power shortages: If you were the president of a country, and your people had no electricity, what would be the first thing you would do? How about shutting down a gold mine? Gold is not actually used for anything, yet gold mines suck out massive amounts of power. Would you rather provide energy for your constituents or produce a bar of gold?
The answer is obvious, and so we see countries such as South Africa institute rolling blackouts for mines — resulting in record high platinum and gold prices. We expect ongoing power issues to becoming even more prevalent in the future, with serious implications to future supplies of many commodities.
Financing: We all know credit is much harder to come by these days. For
Environmental issues: Rightly so, countries are getting more stringent about the projects they approve, with a view to protecting the environment. Environmental permits are not quite as easy to obtain any more, and governments have shifted their priorities away from the jobs projects create to a focus on environmental factors.
Australia recently rejected Rio Tinto’s (RPT/NYSE) proposed iron mine because the environmental protection agency there determined five species of troglobitic animals would be killed by the project. For those who skipped biology, a troglobitic animal is one that lives in total darkness.
Mother Nature: Coal prices and agricultural product prices have soared this year. One reason? The weather. The worst snow storms in China in decades have impacted rail lines and production. The result: China had to import huge amounts of commodities that it used to export.
The rest of the world has to pay the price. Just ask Cameco Corp. (CCO/TSX) how nature can impact production, with its Cigar Lake mine beset by flooding problems. Weather issues world wide only highlight how tight supply is in numerous commodities.
All being said, it seems like there is a potential perfect storm brewing on the commodity front over the next five to 10 years. If the world keeps up its insatiable demand for commodities, watch out — there won’t be much left of anything.
Commodity Prices — February 26th, 2008
Gold N.Y. Spot $ 942.00
Silver N.Y. Spot $ 18.43
Lead LME Cash $ 1.4756
Copper LME Cash $ 3.7512
Zinc LME Cash $ 1.1120
Nickel LME Spot $ 12.63
Aluminum LME Spot $ 1.3045
Platinum N.Y. Spot $ 2121.00
Palladium N.Y Spot $ 520.50
Oil WTI Cushing $ 100.40
Natural Gas (Henry Hub)($/MMBtu) $ 9.14
CAD/USD $ 0.9855
AUD/USD $ 1.0772
USD/AUD $ 0.9283
USD/CAD $ 1.0020
CAD/USD $ 0.9980
EUR/USD $ 1.4874
Nasdaq 2336.77
DJI 12632.49
S&P/TSX 13751.73
S&P/TSX Global Mining 119.10
Lead LME Stocks 45,200
Zinc LME Stocks 122,325
Copper LME Stocks 149,125
Nickel LME Stocks 47,658
Copper COMEX Stocks 13,889
BMO Strategist: High Oil, Metals Prices Have ‘Staying Power’
Base and precious metals prices, along with oil, have “staying power” to remain at historically high levels for some time, underpinned by supply issues as well as demand from developing economies, Bart Melek, global commodity strategist with BMO Capital Markets, said Tuesday.
Melek addressed commodities during a conference call in conjunction with the BMO Capital Markets 2008 Global Metals and Mining Conference in Hollywood, Fla.
Already, base and precious metals have outperformed the broader markets this year, Melek said.
The strategist said there could be some “downward drift” coming for base metals and other commodities only because the U.S. is in an economic downturn.
“But it should be a very, very mild one,” he said. “What helped this time around is supply issues.”
As an example, he cited winter snowstorms in China that interrupted smelting output and transportation, underpinning some of the base metals. And while the U.S. economy may have slowed, the rest of the world overall remains strong, led by China, he said.
“Essentially, there is a lot of staying power for commodities for the long term, and supply is the issue,” Melek said. “That is also true for oil.”
OPEC has indicated a reluctance to increase production any time soon, he continued.
“So we should be prepared to see quite tight oil markets going forward,” he said.
BMO released a report, in conjunction with the conference, listing forecasts for metals and crude oil, with Melek saying the company took the ”conservative” tact.
“I think mainly the risks are on the upside, and there could be significant surprises going forward,” he said.
The report calls for copper to average $2.90 a pound in 2008 and $2.80 in 2009, with a ”
The report calls for gold to average $949 an ounce in 2008 and $900 in 2009, then $700 in the long term. Silver is forecast at $17.23 this year, $17 next year and $12.50 long term.
Crude oil is forecast at $87 a barrel this year, $85 next year and $75 in the long term.
Much of the potential new supply for metals and oil is from parts of the world that are “geopolitically unstable,” and costs are rising, Melek said.
“The supply side isn’t as elastic as it used to be,” he said.
As an example of rising costs, he noted that many of the mining executives at the BMO conference have expressed concerns about a lack of skilled labor — from engineers to drillers and miners.
“There is a chronic, chronic shortage of skilled people, and wages have skyrocketed,” he said. “Some executives I have spoken to were saying drillers were getting as much as $1,000 to $1,500 a day working rigs.”
Meanwhile, governments in parts of the world are withdrawing licenses or forcing mining companies to renegotiate the terms of licenses.
“Certainly it looks like countries that have the resources want a bigger share of the pie,” Melek said. “It shouldn’t be a big surprise that is happening.”
This essentially raises the cost of capital, with companies needing higher prices for the risks they are taking, Melek said.
