I am no economist, and I don’t have a magic formula to predict the future of commodity prices. Instead I read other people’s prognostications and watch for trends. Sadly, the trend that has is emerging involves a downturn in the cyclical high that miners have enjoyed since 2002.
For what my advice is worth, watch the US dollar get stronger. It would appear the recession caused by the sub-prime mortgage fiasco in that country was short-lived. The relative worth of the American dollar affects global commodity markets.
The price of crude oil has dropped from its US$145/bbl high in mid-July to below US$109 despite Hurricane Gustav’s trek across the Gulf of Mexico. The storm blew through the oil-producing region at a relatively mild strength of Category 2 and 1. Analysts who said only a week ago that Canadian gas prices would skyrocket to C$1.75/litre are now saying they will drop even further than the C$1.25/litre it is in Eastern Ontario today.
Everyone jumped on the bandwagon as the gold price topped US$1,000/oz in mid-March. Exploration, development and takeover activity reached a fever pitch. But the high cannot be sustained. With the exception of a brief rise to US$977/oz six weeks ago, the gold price continues to slide, closing just short of US$800/oz on Sept. 2. I would hazard a guess that no other metal price reflects such an inverse correlation to the value of the U.S. dollar.
Copper has been in great demand for traditional uses, and as China enjoyed its Olympic building boom and economic renaissance, the price climbed to over US$4.00/lb in June. Sad to say it has dropped by 75 cents since then and may drop more due to a slowing global economy.
The glory days of the nickel price appear to be over. It peaked in May 2007 in the neighbourhood of US$25/lb. Now it is trading between US$8.70 and $8.80. Again the lower price reflects a downturn in manufacturing and construction around the world.
Zinc prices have been under more pressure for longer than other base metals. The high of just over US$2.00/lb was reached in July 2007, and the slide has been steady to approximately US$0.75/lb during the first week of September. The effect of the softer price is being felt as zinc producers postpone development and expansion or try desperately to cut production costs.
Lead, too, is in the doldrums. After the price ran up to US$1.75/lb a year ago, it is slipping down into the US$0.75 to $1.00 range.
The uranium oxide spot price appears to have levelled off at US$64.50/lb, down considerably from its high of almost US$95/lb at the end of last year. If nuclear energy is going to be the clean power option of the future, the longer-term price of US$80/lb may be sustainable.
Most metal producers feel the pinch in their stock prices, too. The world’s largest miners have seen their capitalization eroded 30-40% over the last year.
The potash market continues to shine because fertilizers have become a necessity. The world’s population still has to eat even if it builds less in the future. North American prices now top US$800/short ton, up from about US$340 at the end of 2007. And that number was more than double from the price received at the beginning of 2004.
Finding an average coal price is problematic because of the variety of coal grades and the ability of individual producers to negotiate contracts. Analysts can only agree on a rise next year, followed by a slight downturn in 2010 and a levelling off after that. That is a sweeping generalization, but the price is spurring exceptional exploration activity in Saskatchewan.
With so many examples of softer prices, particularly among metals, I feel confident expecting the years of boom are about to go bust. If the balloon isn’t ready to burst, I believe it has already developed a slow leak. That so many commodity prices have been so high for so long is a bonus.