No critical copper shortages, but zinc price to continue to rise

In a recently published report, Scotia Capital indicated that critical copper shortages are not likely to occur in the near future, mine reserves are adequate to meet 16 years of needs, and that most copper miners can break-even at $1.10 copper prices.

Analysts Alec Kodatsky, Onno Rutten, Jasmit Gouri and Alex Terentiew also proposed, though, that copper prices will remain significantly above historic norms.

COPPER SUPPLY

While Scotia's analysts acknowledge the tight physical market and inadequate mine supply. "we do not foresee a critical shortage of copper in the near to medium term and believe that what is now a roughly balanced refined market is set to swing into a modest surplus in 2007."

Nonetheless, Scotia forecasts that copper prices will remain "well supported at level significantly above historic norms. Existing producers should therefore enjoy a protracted period of above-average margins, greatly making for a favorable investment climate."

In their analysis, Scotia predicted fundamental copper prices of $1.45/lb this year and $1.48/lb next year. When taking investment into account, however, "we forecast average realized copper prices of $3.11/lb and $2.27/lb" 2006 and 2007.

The analysts revised their long-term price outlook from $1/lb to $1.15/lb, partially based on the following assumptions:

• The copper industry has had a very good success rate in reserve replacement and discovering new economic ore bodies. "There are currently approximately 28 years of annual global consumption contained in identified global reserves. While this is one of the lowest levels of consumption-weighted supply in the past 25 years, it is not what we would consider a critical shortage."

• Displacement between sources of mine supply, the smelting/finery conversion complex, and end-users of copper …will remain intact for the medium term. "We believe that given the increase levels of capital intensity associated with developing mining operations, companies will be slow to increase their appetite for risk in politically unstable regions in the absence of an adequate return promoted by higher metal prices."

• Thanks to the current metal price environment, the copper industry will be able to achieve mine production growth given the geographic diversity of projects and strong mining company balance sheets.

Scotia suggested that global supply of copper concentrate will increase 2.6% to 12.6 million tonnes this year and increase 5% to 13.2 million tonnes in 2007. Their analysis also asserted that "supply-drive speculation in copper is losing steam," citing the muted response to recent events at the Escondida and Chuquicamata mines in Chile.

Fifty-eight percent of current copper reserves (16 years of consumption) are located in seven reasonable politically stable countries, Chile, Peru, Mexico, United States, Australia, Poland and Canada, which is easing the reliance of copper miners on the DRC for future copper sources, Scotia's analysis suggested.

The Scotia Capital report identified three key elements of the current copper market that will allow both the development of adequate new copper supply and the balancing of the physical market in conjunction with lower forecast copper prices.

1) Chinese Demand: As most analysts have already noted, Chinese demand is critical to copper consumption. Scotia believes that Chinese demand will remain healthy for the foreseeable future. The analysts are monitoring five output metrics, which can capture 70% of China's copper consumption including power capacity, air conditioner production, refrigerator production, washing machine production and automobile production.

Scotia forecasts that China's copper demand will grow until the end of the decade at a Compound Annual Growth Rate (CAGR) of 7%. While the analysts anticipate another decade of consistent growth in Chinese copper consumption, they also assert that &