Commodity prices to fall in 2014, but will rebound in 2015-16 - Goldman Sachs

Thursday, December 5, 2013

In the face of falling commodity prices, many mining projects are being scaled down or canceled which will result in lower supply and higher prices as soon as 2015-16, managing director and head of Latin American economics at Goldman Sachs, Alfredo Ramos, told BNamericas.

"Investment in mining and other commodity sectors is being canceled or scaled down in anticipation of potentially soft/lower commodity prices in the near future," Ramos said.

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In Chile, the world's largest copper producer, nine mining projects had been suspended from the portfolio as of end-June, involving US$27bn in investment, according to local industrial association Sofofa.

"As we go into 2014, we expect extra supply of key commodities to hit the market which is just a reflection of investment projects that started 2-3 years ago when prices were higher and that are now maturing and reaching the production stage," Ramos said.

Chile has been ramping up copper production this year, with record output of 2.7Mt in the first half of 2013, up 5.6% year-on-year. However, due to lower prices, export figures have been falling. Copper exports reached US$33.4bn in the first ten months of the year, representing a 2.19% drop from the US$34.1bn in exports in Jan-Oct 2012 and a 9.2% decline from US$36.8bn in copper exports in the same period in 2011.

In Peru, copper projects such as Chinalco's Toromocho and Hudbay's (TSX: HBM) Constancia are due to come on line by next year to boost production.

The Lisbon-based International Copper Study Group (ICSG) is forecasting global refined copper production to increase by around 3.9% at 20.9Mt this year and 5.5% to 22.1Mt next year, resulting in a market surplus of 387,000t and 632,000, respectively.

"But as we go into 2015-16, we expect the marginal cost of production to move up and supply to suffer from the reduction in investment that we are seeing right now," Ramos said.

"By scaling down investment in commodities, we are creating now the next up-cycle for copper and other commodity prices. We will probably have to wait until 2015-16 to see prices rebounding from the decline we envisage for 2014," he added.

Copper closed Thursday at US$3.212/lb cash on the London Metal Exchange and is averaging US$3.323/lb so far this year.

According to consensus forecasts compiled in the BNamericas' Mining Outlook 2014, copper will average around US$3.28/lb in 2014.