A Solid Year for Base Metals Interview by Robert Graham
Base metal producers provided investors with terrific returns in 2003, can we expect the same in 2004? The outlook is good says Harris Partners Manager of Research Michael Fowler
Falconbridge Ltd (T.FL) Teck Cominco Ltd Cl B SV (T.TEK.B)
Transcript IC: The base metals producers have provided investors with impressive returns this year. Stocks such as Inco, Falconbridge and Alcan have all been climbing higher on the back of rising commodity prices. Will the ride extend into 2004? Joining us is Michael Fowler, metals and minerals analyst at Desjardins Securities. Mr. Fowler, explain why base metal prices have moved sharply higher. What do you think is in store for 2004?
Fowler: The thing that really drove the prices up in 2003 was an expectation of a global recovery and there’s some pretty good evidence right now that we’re seeing some pretty robust recovery in the US. So you talk about the leading indicators, industrial production, etc., etc. So there’s anticipation of a global recovery.
But also, there was a lack of supply basically in a lot of the base metals and there hasn’t been a lot of capacity additions in the last few years. So with strong demand and tight supply, that really led the base metal prices up.
And plus I shouldn’t forget talking about China, which is still booming and a major consumer of base metals as well.
The outlook for 2004 is extremely good for the base metals and we’re looking for price increases in just about all of the base metals that we cover.
IC: Are companies going flat out to try to prevent inventories from falling further or is there some perhaps deliberate moves on the part of companies to hold back a little bit, to maintain the upward pressure on prices?
Fowler: That’s a good question. In fact, there has been some news that potentially there has been some collusion in the aluminium market, but I’ve no real information on that. I just noted a report the other day on the aluminium market.
But generally companies I think will be increasing their production level in 2004. For example, in nickel, we expect Inco to be back on stream, for example, after their strike in Russia so that they’re going to increase production.
So generally, I wouldn’t say there’s any collusion to hold inventories down. In fact, just the opposite I think. Output will actually increase in most of the cases.
IC: You mentioned China. Would you say that China is the single biggest factor right now in terms of a demand in pricing pressure on commodities? And if it is, should we not assume that the ride higher will continue for several years out because that market appears to have an insatiable appetite right now.
Fowler: Yes, I think China is going to continue to boom next year and is going to consume. In fact, it is the most important element of the metals markets as we speak. So therefore, the future of the metals, all of them are extremely good.
The only thing is that if metal prices get high enough, that sort of entertains a substitution of the metal into another metal. For example, nickel, which is going through I believe a spike phase, and I think there’s going to be some substitution of aluminium for nickel.
IC: Is there any possibility of metals inventories declining to levels that you could call troublesome?
Fowler: At the moment, although, the inventories are fairly – depending on which metal you’re talking about – but they’re fairlymoderate I guess, a moderate level at the moment. I don’t see any inventories going to zero or anything like that.
I think inventories across the board will fall and that will propel prices higher. But I don’t think we’re in the kind of a dangerous category in the foreseeable future.
IC: What do you think will be the top story in 2004 in the sectors that you cover?
Fowler: Well, I am bullish on copper and I think Falconbridge is going to be a story in the bigger names and in the mid-cap names Inmet Mining is another one, a copper related stock, and Teck Cominco is going to benefit hugely from the coal side and some small… I had some small-cap stocks which I follow as well, such as Fortune Minerals.
IC: If you could recommend just two stocks right now that listeners would be wise to jump aboard and snap up, what would they be?
Fowler: Well, I like Falconbridge for the nickel, copper exposure and the other one that I like is Teck Cominco.
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