2011: The year for aluminum, molybdenum, zinc and potash

With aluminum, molybdenum and zinc expected to catch up to other metals in 2011, shares of Thompson Creek Metals Co., Alcoa Inc. and Teck Resources Ltd. should outperform the sector, according to Desjardins Securities analyst John Redstone.

He pointed out that Thompson Creek will likely expand molybdenum production by about 8% in 2011 and make further progress toward the start-up of the Mount Milligan copper mine.

Mr. Redstone told clients that not only is Alcoa currently trading more than 50% below its replacement value, but it has lowered its breakeven aluminum price to roughly US$1.00 per pound.

As for Teck, the analyst anticipates it will hold onto its role as the world’s third largest zinc producer. This will be supported by zinc concentrate production at the Red Dog and Antamina mines, as well as zinc metal production at the Trail smelting complex in British Columbia.

While Mr. Redstone expects prices for other metals and bulk commodities to remain strong, he noted that molybdenum, aluminium and zinc lagged (most notably copper) in the second half of 2010. This came after a recovery from extremely oversold positions in 2009 and early 2010.

“This was principally because of the superior underlying fundamentals of the copper market,” the analyst said. “However, in 2011 we expect all of our covered metals to move into a deficit market, ie demand should outstrip supply.”

With the current inventory not excessive for any metal, he suggested that any drawdown should lead to upward price pressure.

For molybdenum in particular, Mr. Redstone pointed out that premiums currently being discussed between producers and consumers for delivery in 2011 have apparently improved significantly from 2010 levels.

“In spite of lacklustre demand from the stainless steel sector (which accounts for roughly 25% of molybdenum end use), inventories remain at historically low levels,” he said. “Hence, as the market moves into deficit, prices should react sharply.”

In addition, India has emerged as a major consumer of molybdenum.

Meanwhile, prices for flat rolled products (which account for roughly one-third of aluminum end use) are rising in all major markets. The premium for metal delivered into the U.S. midwest remains at historical highs and Chinese demand for aluminum continues to grow at a rapid rate.

Mr. Redstone also expects aluminum prices to climb as a result of cost pressures, as high power prices have led to recent production cuts by both Rio Tinto in New Zealand and Novelis in Brazil. Some smelter capacity remains shuttered in China due to high power prices and environmental restrictions.

For zinc, the analyst noted that galvanized steel production (which accounts for roughly 60% of nickel end use) is experiencing strong growth in several regions.

While European producer premiums for metal are up US$20 per tonne from a year ago, the premium for metal delivered into the U.S. market is at US4.8¢ per pound versus US2.9¢ at the end of 2009.

“Furthermore, as we move through 2011, the prospect of looming closures of major mines—at a time when there is very little new mine production coming onstream—should provide upward pressure on prices,” the analyst said.

Finally, Mr. Redstone believes potash prices will move up and match the rise in other fertilizers.

Potash Corp. of Saskatchewan is his favourite name due to its better upside potential compared to Agrium Inc., as well as the catch-up effect, particularly outside of North America. He also expects Potash to remain the world’s low-cost producer of potash and to increase its production by more than 40% by 2013.

The analyst expects the strong recovery in grain prices seen in 2010 will continue to benefit fertilizer markets in 2011, with corn prices exceeding US$6 per bushel. He noted that consumers have historically increased their potash purchases once corn price move above US$4.