TORONTO (miningweekly.com) – The US’s economic recovery is continuing to gather pace, supporting the physical demand for metals, export credit agency Export Development Canada VP and chief economist Peter Hall told members of the Canadian Institute of Mining’s Management and Economics Society last week.

However, investment in metals and the mining industry was likely to remain muted as money continued to move away from commodities or commodities-focused companies into other sectors promising higher returns.

REBORN IN THE US

Hall highlighted US housing starts as a positive leading economic indicator and one that also boded well for mining as new homes required metal-intensive fixtures and fittings. “As a leading indicator, housing starts are exciting because it’s about all the stuff that goes into homes; all the furnishings, appliances and so forth,” he said on September 25.

US auto sales continued to improve and support metals uptake. “Auto sales have been doing well as Americans have been doing something that’s very un-American for several years now – they’ve been driving around in clunkers and not buying new vehicles.”

“Better yet, there’s still some way to go here as the average US automobile is over ten years old, even with the pace of the recent buying activity factored in,” Hall added.

In addition, US manufacturing continued to improve. “The beleaguered US manufacturing sector, which is not supposed to come back for another five or six years, is growing,” he pointed out.

Given the growth, companies would have to invest in additional capacity as increases in production used up spare capacity. “We’re now on the threshold of a dramatic increase in business investment. In fact, it’s happening already,” Hall noted.

Growth for 2014 would be comparatively robust. “I’d say the USA will achieve between 3% and 3.5% sustained growth, and I think it will be towards the higher end of that. Next year is looking strong too.”

The debate about tapering and an end of quantitative easing (QE) were positive signs as well. “After all, nobody would be talking about tapering and the end of quantitative easing if it wasn’t for growth,” Hall said.

However, the full effects of the tapering will not be immediately apparent, he stated, as QE had never been done before and neither had the withdrawal of QE.

“Central banks might say: ‘It’s just the mechanism reverse – why’s everyone so worried?’ Well not so fast. There’s the potential for unintended damage … We have entered virgin territory, shifting economic gears at the same time.

“Regarding interest rates, our forecast is for US levels to start rising in late March 2015, followed by a sequence of increases occurring over the following two-and-a-half years, taking rates up to 4% nominal. Canada is about six months behind that curve,” he explained.

MONEY MATTERS

But not all developments stemming from the current growth will have a positive effect on the mining sector; money is seeking returns from higher-yielding sectors and its withdrawal away from mining and metals is likely to continue.

“The past few years witnessed a flood of liquidity looking for yields. But where did the money go? Well, a lot of it went into your space, the mining sector,” Hall said, adding that he believed this created huge mispricing over the past five years, building the illusion that it was real.

“Today, chief financial officers have noticed the growth and are saying: 'Investing in the thing we do best is finally looking more attractive.' So what do they do? Well they go back to their normal [pre-recessionary] activities,” he explained.

However, the blow of money exiting the system will be tempered as industrial production rises and the level of physical uptake improves on this. But, Hall emphasised that the two elements did not exactly balance each other out, with Export Development Canada believing there would still be a downward drift in commodity prices despite the global economy’s revival.

“Precious metals are likely to face a bit more of a drubbing. Incidentally, I’ve received quite a lot of hate mail for speculating that gold will be at a triple-digit level in three years,” he quipped.

Copper was likely to remain on a downward trend, as “we believe something below the $6 600/t [London Metal Exchange] level is where it will land. The turnaround would not occur until somewhere around 2016, with modest appreciations from there.

“With oil, we’re looking at a low $90 level for a barrel of [West Texas Intermediate]. That speaks to how much capacity was created and bought into the system due to the previous high prices,” Hall said, highlighting that geopolitical concerns notwithstanding, and Russia notwithstanding, the Canadian export credit agency believed these prices would be quite well behaved.

BOTTLENECKS

Other factors likely to affect the extractive industries’ outlook related to infrastructure. Both Canada and the US currently had rail capacity issues, with oil shipments often prioritised owing to the absence of pipeline capacity.  

“This means you might have a hard time getting your ore or minerals onto a train and transported to the coast or south across the border [for Canadian companies exporting to the US] because track space is being subscribed by something else,” Hall elaborated.

For Canada, the portside capacity was vital as the country continued increasing the level and percentage of exports into the emerging markets, particularly in Asia. “Since 2003 something remarkable has been transforming the Canadian trade picture; our trade with the emerging markets is now at 12% and growing. This includes high value-added, medium and primary products,” Hall said.

But, he pointed out that the difficulty with infrastructure was that it could not be put in place immediately and most of the "shovel-ready stuff" Canada had was completed during the stimulus, stressing, however, that infrastructure development was not solely government’s responsibility as business had a stake too.

“These things are well understood in Ottawa [Canada’s federal capital]. The government knows that exports are the engine that will drive Canada forward and that they need to facilitate them as much as possible,” Hall concluded.