GEOFF CANDY: It’s interesting then given this scenario now we’re talking about the various countries involved, the commodities themselves have also had varying degrees of success over the course of the last ten years or so and a lot of it, as you said, had to do with supply and demand specifically, is that what’s likely to happen going forward as well?
JIM LENNON: Yeah, I think if you look back over the last 15 years the commodities that have done the best have been those where China has struggled to meet its own demand and the ones that have done the worst have been where China has provided its own supply growth solutions. So for example in copper China is only meeting around about one quarter of its demand from domestic sources, they have to import the rest. Copper has massively outperformed many of the other commodities. In iron ore, once again, China has got resources but they are very, very low grade and very, very high cost and that has kept the underlying price high. The commodities that have bombed have been things like aluminium, alumina, nickel, zinc, where China has through various means supplied virtually all of its own requirements. In fact, in something like aluminium China went from a net importer in 2000 to a net exporter today. So you see that in those commodities and steel is another one where China was an importer and is now an exporter those commodities have not done so well. The ones that will continue to do well are the ones where it’s not just China but the rest of the world is going to struggle to meet the demand growth.
GEOFF CANDY: So how would you rank the commodity complex now, the base metals, particularly which ones do you like the most?
JIM LENNON: Okay, well, I think in the very short run, the next year or so, I think copper is seeing a supply response, it’s pushed it from deficit into surplus but quite frankly it’s a very short-term phenomenon. I think 2014, 2015 are surplus years, albeit not very large and then on our projections the copper market swings back into deficit through the balance of the decade. But in the near term zinc is really struggling in terms of bringing on new mine supply to meet demand that we see developing over the next few years. Once zinc absorbs the overhang of inventory I think that could be a very strong performer. Tin and lead, also very minor commodities, look pretty good. On the bulk commodities I think iron ore will continue to surprise people on the upside, we think prices will drift lower from recent levels but certainly our view remains that it can hold US$100 for many years to come simply because of the structure of the cost curve and the likely depletion of reserves in China. Coal I think is going to struggle, it’s going to continue to struggle for a while longer.
GEOFF CANDY: Seaborne iron ore, particularly being the star performer and likely to carry on doing pretty well?
JIM LENNON: Ja but I think, as I said, it’s going to outperform expectations. The widespread expectation is that the price is going to go down and we don’t disagree with that but we do disagree very strongly with the expectation that as early as next year you’re going to see prices in the $80/ton range because quite frankly at $80/ton probably 250m tons of existing supply would not be economic, would be losing money and that would be forced out of the industry. So when we look at the projections of iron ore supply from Australia, Brazil and elsewhere in the world you’ve got to factor in that quite a bit of it is going to be replacing high cost supply in China and other parts of the world. In addition to that the depletion at existing iron ore mines, if you take global supply, you’ve got a depletion rate of round about 50m tons a year as a result of declining reserves. So we think that when you take all those factors into account iron ore is going to hold above $100 at least for I would say the next three to five years.
AGO Price at posting:
$1.04 Sentiment: Buy Disclosure: Held
