Base Metals – Deficits Looming On The Horizon As Demand Poised To Outpace Supply – Monday, January 10, 2011
With metal prices in Q4/10 sustaining levels above our recent forecasts, we are taking this opportunity to adjust our commodity forecasts. We have also adjusted our long-term assumptions modestly to reflect the ongoing weakness in the US dollar. Driven by continued growth in China, an emerging India and a slow but recovering western world, we maintain the view that the supply side response will be insufficient, especially for copper, coking coal and zinc, thereby pushing prices higher. While the recent run up always leaves room for a correction, we believe the fundamentals remain robust and the ongoing weakness in the US dollar coupled with inflation uncertainty should only add to the price support. As such, we see the price strength continuing in 2011 and believe material price spikes are not out of the question. On the equities side, we would look for M&A activity to heat up given the robust cash position within the industry and the need to commit to new supply over the medium term to alleviate market tightness.
In light of our revised price deck, we have updated our near-term earnings and cash flow estimates. We have also adjusted our target prices and recommendations based upon our revised outlook and current market prices. Our valuation methodology remains unchanged. In general we continue to view the sector as a blanket buy and maintain it is prudent to have an overweight position.