Scotiabank’s Rory Johnston on ‘volatile’ 2018 for commodities and outlook for 2019

Rory Johnston is a commodity economist covering energy and metals markets in Scotiabank’s Economics Department. His research includes the Scotiabank Commodity Price Index (a monthly assessment of developments affecting the prices of major Canadian export commodities), contributions to Scotiabank’s Global Outlook (the department’s flagship quarterly forecast), as well as notes on various topics of interest to the Canadian commodity sector. He recently spoke to The Northern Miner about his outlook for 2019.

The Northern MinerIn your latest commodity note in mid-October, you said that you believe the U.S.-China trade war will be “long-lived and remain a slow-burn drag on industrial commodity sentiment through to the 2020 U.S. presidential election.” Why don’t we start there?

Rory Johnston: The important thing to note here is that the impact of the trade dispute on metals prices and the market are above and beyond what the impact has been on physical demand so far. The market is betting that the trade dispute will slow global growth and will lead to less demand. We haven’t seen that yet, but we might see some mild slowing in 2019.

We don’t believe that the trade dispute will intensify further due to the political costs for the White House of a final tranche of traded goods being heavily tilted toward consumer items, like iPhones. We don’t think it’s going to accelerate but it won’t be solved either. It seems relatively popular in the U.S., politically, even if it’s causing consumer prices to rise. Standing up to China on trade holds fairly broad bipartisan support, so even with the Democrats controlling the House, it doesn’t seem likely that it will be materially rolled back any time soon. I think this will likely come up as an issue in the next presidential elections, frankly. If it was raised, it would be raised as a broader question on the U.S. position on trade and cooperating within the global system, more so than at this stage right now.

TNMThe U.S. China trade dispute has dented the outlook for base metals demand.

RJ: The world was running quite hot — demand and economic growth were extremely strong. But it can’t be sustained. Both Canada and the U.S. are growing above potential, in terms of the natural run-rate of the economy, which is why we see inflation rising and banks beginning to tighten interest rates to slow the economy, which is running a bit too hot relative to where it should be in the long term. And Canada and the U.S. are experiencing that right now. So we expect that growth will slow slightly. The peak of that growth is likely behind us now for this cycle, so that will moderately weigh on all commodities next year, but not materially so, we’re talking a slight easing off on the gas pedal.

TNMWhat are your price forecasts for some of the base metals? I believe you’ve said recently that copper prices will average US$3 per lb. in 2019 and $3.25 per lb. in 2020.

RJ: Generally the story on copper is that the market right now is underpricing it relative to its fundamentals. It’s not extremely tight at the moment. No one is really scrambling for copper right now, but the entire market knows there will be significant supply deficits coming down the line, with the penetration of higher-tech manufacturing, buildouts of power grids, not to mention the pickup in the electric vehicle (EV) story and it all bodes extremely well for copper.

So copper demand is going to keep chugging along at a very strong pace, and the supply isn’t really there in the early 2020s. There are some projects but not nearly enough to fill the gap. We think prices need to rise above US$3 per lb. to provide the incentive to finalize investment decisions and break ground and start the timeline to get a new copper mine from development to production, which typically takes roughly seven or eight years. We need investment and at these prices, we’re probably not going to see that investment. So we see prices moving higher in the early 2020s, we could very easily see US$3.50 per lb. copper if not US$4.00 per lb. in the early 2020s — 2022 to 2024 — that’s when prices are really going to start picking up, based on the long-term outlook where we see mines coming online and the trend rate for demand, which we think is going to be relatively robust. We don’t see a global recession in our outlook, so the big question is when will the market really wake up to the knowledge of those deficits and when will current pricing begin to reflect that supply gap in today’s market. We haven’t seen that yet.

TNMWhat about zinc?

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