London — Base metals mining costs are set to remain low over the next 12 months, despite expectations of strengthening oil prices, Societe Generale said Tuesday.
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SocGen said it had configured its production cost model in order to forecast mining costs one year ahead by incorporating 41 different currency forecasts, 48 inflation forecasts, and oil and metal price forecasts into the model.
"The result suggests minimal change in the one-year forecast for mining costs for all metals relative to the already currently discounted mining costs," the French bank said in a research note.
"This is significant, suggesting that the current low-cost environment is likely to persist despite widespread consensus that oil prices will rise over the medium term and that mining costs will increase."
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The main reason for the similarity is the fact that the forecast rise in oil prices "is not significant enough to offset further predicted currency weakness," SocGen said.
"We are forecasting oil prices to rise by approximately 9% relative to the 41 currencies that on average are predicted to weaken by 4.5% over the next year," it said.
"Despite a significant proportion of this currency weakness being offset by rising inflation, currency dynamics are such an important driver of mining costs, that the impact of an oil price rise of this magnitude is largely insignificant with respect to mining costs," SocGen added.
Collectively, these factors -- along with the bank's metal price forecasts -- combine to produce a "rather muted" impact on future mining costs, with the net effect that they will continue to remain low," SocGen said.
"This reduces the likelihood of future production cuts in the context of the weak price environment at the present time. It also reduces the risk of production cuts in the event of higher oil prices (acting to increase mining costs) due to the offsetting effect of future currency weakness," the bank added.
As of March 23, copper was trading at 18.5% above its implied cost floor, based on SocGen's production cost model which factors in the steep declines in many producer currencies and the oil price since 2014, the bank said, citing this as "a key reason why production cuts have not been as forthcoming as prices would perhaps suggest."
Looking at the other metals, "nickel is trading 21.47% below the implied cost floor and zinc 24.31% higher," SocGen said.
"This suggests that nickel production is currently the most vulnerable to production cuts and that zinc prices are currently trading the furthest above any meaningful cost support -- a potential downside risk," it added.
--Andy Blamey, firstname.lastname@example.org
--Edited by Jonathan Loades-Carter, email@example.com