A truck carries 250 tons of coal to the surface of the Spring Creek mine near Decker, Mont.Matthew Brown/The Associated Press
The four-year rout in metal prices is near an end as China embarks on a new round of public works, according to fresh forecasts from Credit Suisse.
The investment bank sees better times ahead for aluminum, metallurgical coal, zinc, lead and gold as China's government seeks to stimulate the country's slowing economy through spending on infrastructure.
While copper and iron ore still face challenges ahead, the bank's mining and metals team says that China's about-face on public works is one factor lending support to other parts of the metal universe.
Beijing's anti-corruption campaign had stalled many infrastructure projects, with approval times growing from three months to as long as two years, but Credit Suisse says the government is now speeding up the process by indicating it will tolerate mistakes. As a result, construction activity will bounce back late this year and over the next couple of years.
"The improved outlook for [Chinese] infrastructure is a major change from our previous view that infrastructure would decline, particularly expressways and railways," the commodities report, published Friday, noted.
Zinc and lead remain the bank's top picks in base metals. Both commodities are moving into shortfall following the closure of some large mines. Credit Suisse expects lead prices to climb to $1,900 (U.S.) a tonne in 2017 from current levels around $1,700, and forecasts zinc prices will burst through $2,000 a tonne, a substantial increase from today's $1,750.
"Nickel prices should also jump" once producers start closing mines, the report said. Miners with diversified operations have so far resisted cutbacks by subsidizing their nickel mines with profits from other metals, but Credit Suisse believes their attitude will change.
"As yet, we have seen few signs of discipline but producers cannot sustain losses indefinitely," the analysts wrote. They expect cutbacks to start by the middle of the year, which should propel nickel prices from their current levels around $8,500 a tonne to above $13,000 a tonne in 2017.
Despite the generally upbeat nature of the report, Credit Suisse warns of trouble ahead for iron ore and copper.
While iron ore has performed strongly this year, the analysts argue that current levels near $54 a tonne will be difficult to sustain as major miners flood the market with new supply. Prices will slide to around $40 a tonne by 2018, they predict.
In a new twist, the researchers have also turned negative on copper. While many forecasters believe a supply gap will open up in a couple of years, the Credit Suisse team disagrees and predicts the metal, now around $4,700 a tonne, will slide below $4,000 in 2018.
Supply is growing from mine expansions, particularly in Peru, and "we believe China's copper demand has slowed sharply and will not reaccelerate as the catch-up stage of copper consumption has passed," they wrote.
In contrast, the analysts upgraded their outlook for gold and silver prices.
Precious metals will benefit from declining real interest rates and the U.S. Federal Reserve's deferral of interest rate hikes, they said. Since gold produces no yield, it tends to do best at times of low real rates, when other investments also offer little in the way of a payout.
The analysts say gold is unlikely to slide back below $1,150 an ounce because production of the precious metal is waning, as existing mines begin to peter out.
"Reserve life has declined from 14 years to 10 years and we forecast supply declining by 8 per cent from 2016-18," they wrote. As a result, they expect gold to peak at $1,350 an ounce in 2017.
Silver lacks gold's strong fundamentals, but Credit Suisse still sees it gaining in response to strong buying from exchange-traded funds. It predicts the metal will rise from its current price around $15.30 an ounce to $17 by later this year.
In separate reports, Credit Suisse upgraded both Barrick Gold Corp.and Eldorado Gold Corp. to "outperform."
The bank likes how Barrick is deploying its capital and argues its insistence on high returns from new projects will result in high leverage to any rise in the gold price. For its part, Eldorado appears attractively valued, the analysts said.
Ian McGugan