Canadian Mining Eye
Weak finish for the Canadian Mining Eye in Q4 2016
The Canadian Mining Eye index declined 13% during Q4 2016, compared with a 4% gain in Q3 2016. The Canadian Mining Eye index underperformed the S&P/TSX Composite index, which gained 4% during Q4 2016. The UK Mining Eye fell 8% during Q4 2016 marking the first quarterly decline in 2016, following gains of 35% and 19% in Q3 2016 and Q2 2016, respectively. The London Metal Exchange index (LMEX) gained 8% over the quarter. The S&P/TSX Composite Metals and Mining index decreased 12% in Q4 2016, following 3% declines in Q3 2016. The Canadian Mining Eye index’s decline was predominantly due to weakness in gold and nickel prices, offset partially by gains in both copper and zinc prices. Major index’s decline of 6% in Q4 2016 was consistent with a 3% drop in Q3 2016. For the full year 2016, the Canadian Mining Eye index rose 61% which was better than 18% gains in S&P/TSX Composite index and 21% increase in LMEX. Meanwhile, the Canadian Mining Eye index was in-line with the UK Mining Eye and S&P/ TSX Composite Metals and Mining index. Majors increased 42% in 2016 following a decline of 26% in 2015.
In a boost to gold demand, the metal is now accepted as an investment in Islamic finance, which under the Shariah law, was only allowed to be owned in physical form (such as jewellery). With this adoption of gold as an investment, the potential demand for gold and gold-based investments (such as ETFs) are expected to increase.1 According to World Gold Council, the potential demand is expected to increase by roughly US$20 billion or around 500 tonnes by 2020, assuming just 1% contribution to the total estimated Islamic investment in financial assets at US$2 trillion, growing at an average rate of 16% annually.2 However, Standard and Poor’s estimates Islamic investment in financial assets to track towards US$5 trillion over the same period. The new standard is expected to be positive for Canadian gold miners as four Canadian gold miners feature in the top 10 gold producing miners in the world.3
- Gold: Following a flat trend in Q3 2016 and a gain of 7% in Q2 2016, the gold prices remained subdued by declining 12% in Q4 2016. The recent weakness can be attributed to oversupply market conditions, amounting to a surplus of around 250 tonnes, representing the highest quarterly surplus environment in the past decade, according to Thomson Reuters.4 Additionally, the Federal Reserve increased its key interest rate by 0.25% in December, putting downward pressure on gold prices.5 Overall, the gold prices moved up by 9% in 2016.
- Base metals: Copper prices increased 14% in Q4 2016 following the flat trend in Q3 2016. The considerable increase in copper prices was in part due to an anticipated increase in infrastructure spending by US newly elected President, Donald Trump, which is expected to boost demand for basic metals. In addition, increased demand for copper from China, the world’s largest copper consumer, on the back of improving macroeconomic conditions, provided further impetus to copper prices.6 Zinc prices increased 8% in Q4 2016, while nickel prices declined by 5%. Overall, in 2016 copper, nickel and zinc prices moved up by 17%, 13% and 61%, respectively.
Investors will continue to view gold as a safe haven investment, given the uncertainty surrounding the various policies and plans under the Trump presidency.7 Heading into 2017, gold prices are expected to increase compared with 2016, underscored by higher geopolitical risks, given upcoming elections in Europe, improving supply-deficit market conditions, and higher demand from Asian countries, primarily China and India (post demonization of cash currencies). Key headwinds include rising economic confidence in the US, evidenced in part by a 0.25% hike in Fed rate in December, coupled with a possibility of further hikes in 2017.8
On the base metals front, copper prices are expected to increase due to encouraging infrastructure spending plans (primarily power grid and railway network) in China and Trump’s financial stimulus of US$1 trillion in infrastructure spending. However, the former factor is anticipated to weigh more on the positive outlook of copper prices, as China’s copper consumption (45 to 55% of global consumption) is higher than that of the US (8 to 9%).9 The underlying fundamentals for zinc continue to be healthy, underscored by favorable supply deficit market conditions, supported in part by the recent closure of Century and Lisheen mines and the shutdown of ~500ktpa of production at Glencore.10 Encouraged by the recovery in commodities prices in the latter half of 2016 and anticipated benefits from improved productivity and enhanced profitability, the outlook for the Canadian Mining industry remains healthy.
- 1. ““More on How a Change in Islam’s Shariah Law Could Affect Gold Prices,” msn.com, 13 July 2016
- 2. ““A New Shari’ah Standard For Gold,” CommodityOnline, 1 November 2016
- 3. “S&P Global Market Intelligence, a division of S&P Global
- 4. ““Physical gold market in largest surplus in a decade,” Mining.com, 27 October 2016
- 5. ““Finally: Fed raises rates for first time in 2016,” CNN, 15 December 2016
- 6. ““Dr. Copper hints mining sector officially out of intensive care,” Mining.com, 24 November 2016
- 7. ““Trump’s win: Canadian Implications,” Barclays, 9 November 2016
- 8. ““Gold Sector Forecasts,” Credit Suisse, 6 December 2016; “Global Gold Outlook: More Caution Advised,” RBC Capital Markets, 11 December 2016
- 9. ““Base & precious metals outlook,” Credit Suisse, November 2016; “Canadian Base Metal Equities,” Macquarie Research, 11 November 2016
- 10. ““Metals & Mining,” Dundee Capital Markets, 14 October 2016; “Divergent Paths - Commodity Outlook Update and Q3/16 Base Metals Preview,” Canaccord Genuity, 24 October 2016