Government gamble on metals a long shot

Nothing lasts forever. The latest reminder of this pithy aphorism comes courtesy of DBRS, a Toronto-based debt-rating agency.

Nothing lasts forever.

The latest reminder of this pithy aphorism comes courtesy of DBRS, a Toronto-based debt-rating agency.

In its recent report, the agency suggests the current metal boom is bound for a header.

Since 2003, thanks to demand from emerging economies — think China and India — the composite index for eight minerals has tripled in value.

That led some analysts to suggest this unprecedented demand has permanently increased the prices of metals. That what has come up won’t fall back down.

DBRS doesn’t agree.

“The latest rise in prices is consistent with the historical experience and economic fundamentals of a cyclical upturn, implying that, as in previous cycles, prices will eventually retreat back towards pre-boom levels,” said the agency report.

To wit: nothing lasts forever.

Especially the growth of emerging economies.

As they start to cool, even to red hot from white, the effect will be felt in the commodity markets.

“Even a relatively modest decrease in Chinese growth from 10 per cent to a still very strong seven per cent would result in a significant easing in base metals demand growth,” it said.

A US recession, which appears to be taking hold, would hasten the cooling as American demand for foreign goods slackens.

“The longer that high prices persist, the stronger the incentives that China and India will have to shift towards products that are less dependent on costly base metals,” said DBRS.

The longer the prices stay high, the better the chance they’re going to fall, the agency said, suggesting the crash could come as early as three years and as late as five years.

“One can reasonably expect that when prices eventually decline, they will do so more rapidly and slump for a longer duration than in previous cycles,” said the agency.

And here’s the “so-what” moment.

Jurisdictions that rely on base-metal exports should adopt “more prudent” revenue and debt-management techniques, said DBRS.

That warning comes as the Yukon government signed a four-year, $12-million power deal with Sherwood Copper.

That deal has enabled the extension of the hydropower grid from Carmacks to Pelly Crossing.

The government is gambling that deal will lower power rates to electrical consumers in the long term.

Not coincidentally, Sherwood has secured a guaranteed price for its copper for four years.

After that hedge expires, it’s back to the markets.

If the markets remain healthy, Sherwood is a good bet.

If not, all Yukon ratepayers will pay for the Fentie government’s gamble.

The DBRS report is the first suggestion that gamble is by no means a sure thing. (RM)