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BMO Strategist: High Oil, Metals Prices Have ‘Staying Power’

February 27, 2008 at 9:47 by Mario

Base and precious metals prices, along with oil, have “staying power” to remain at historically high levels for some time, underpinned by supply issues as well as demand from developing economies, Bart Melek, global commodity strategist with BMO Capital Markets, said Tuesday.
Melek addressed commodities during a conference call in conjunction with the BMO Capital Markets 2008 Global Metals and Mining Conference in Hollywood, Fla.
Already, base and precious metals have outperformed the broader markets this year, Melek said.
The strategist said there could be some “downward drift” coming for base metals and other commodities only because the U.S. is in an economic downturn.
“But it should be a very, very mild one,” he said. “What helped this time around is supply issues.”
As an example, he cited winter snowstorms in China that interrupted smelting output and transportation, underpinning some of the base metals. And while the U.S. economy may have slowed, the rest of the world overall remains strong, led by China, he said.
“Essentially, there is a lot of staying power for commodities for the long term, and supply is the issue,” Melek said. “That is also true for oil.”
OPEC has indicated a reluctance to increase production any time soon, he continued.
“So we should be prepared to see quite tight oil markets going forward,” he said.
BMO released a report, in conjunction with the conference, listing forecasts for metals and crude oil, with Melek saying the company took the “conservative” tact.
“I think mainly the risks are on the upside, and there could be significant surprises going forward,” he said.
The report calls for copper to average $2.90 a pound in 2008 and $2.80 in 2009, with a “long-term” forecast years out of $1.80. Aluminum is forecast at $1.06 a pound this year, then $1.05 for next year and the long term. Zinc is estimated at $1.01 a pound this year, 90 cents next year and 80 cents long term, and nickel $12.31 a pound this year, $12 next year and $8 long term.
The report calls for gold to average $949 an ounce in 2008 and $900 in 2009, then $700 in the long term. Silver is forecast at $17.23 this year, $17 next year and $12.50 long term.
Crude oil is forecast at $87 a barrel this year, $85 next year and $75 in the long term.
Much of the potential new supply for metals and oil is from parts of the world that are “geopolitically unstable,” and costs are rising, Melek said.
“The supply side isn’t as elastic as it used to be,” he said.
As an example of rising costs, he noted that many of the mining executives at the BMO conference have expressed concerns about a lack of skilled labor — from engineers to drillers and miners.
“There is a chronic, chronic shortage of skilled people, and wages have skyrocketed,” he said. “Some executives I have spoken to were saying drillers were getting as much as $1,000 to $1,500 a day working rigs.”
Meanwhile, governments in parts of the world are withdrawing licenses or forcing mining companies to renegotiate the terms of licenses.
“Certainly it looks like countries that have the resources want a bigger share of the pie,” Melek said. “It shouldn’t be a big surprise that is happening.”
This essentially raises the cost of capital, with companies needing higher prices for the risks they are taking, Melek said.

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