Commodities | Nov 04 2011
– Europe's issues, global growth outlook weighing on metal prices
– Barclays Capital expects base metal prices should trend slightly higher in 2012
– Precious metal prices also forecast to improve
By Chris Shaw
On the back of sharp declines in prices over the past few weeks, metal markets in recent sessions have been relatively unmoved despite an improvement in underlying fundamentals. According to Barclays Capital, this reflects the market's current focus on Europe and the health of the global economy.
But with the EU Summit reaching an agreement on sovereign debt issues, Barclays suggests one key risk to the market now appears to be receding. This has allowed base metal prices to gain some upward traction, though attention is now likely to focus on China and whether or not that economy can engineer a soft landing.
With this as a backdrop Barclays has updated its views on the base metals suite. For aluminium, prices in recent weeks have remained relatively steady around the US$2,200 per tonne level, with downside limited by perceived support from the cost curve.
Barclays notes production cuts have yet to materialise, but the apparent positive turn for the European debt crisis and increasing evidence of a soft landing in China should support higher prices. Barclays is forecasting an average price of US$2,300 per tonne in the final quarter of this year. Average annual price forecasts stand at US$2,450 per tonne for 2011 and US$2,544 per tonne for 2012.
The significant volatility in copper prices in recent weeks has seen prices decline and then move back towards the US$8,000 per tonne level, but uncertainty regarding Europe leads Barclays to suggest there remain hurdles to the price trading more in line with underlying fundamentals.
Assuming the macro environment becomes less hostile Barclays expects the market's fundamentals will push prices higher, as LME stocks have fallen and seasonally stronger demand is coming into play. Mine output also continues to underperform, which supports the forecasts of Barclays of average prices of US$8,941 per tonne this year and US$10,075 per tonne in 2012. This compares to a December quarter average forecast of US$8,000 per tonne.
Lead has also experienced volatile market conditions in October, again Barclays seeing this as a reflection of macroeconomic news flow. A market surplus and a less defined cost curve has meant lead prices have not offered much resistance to fluctuations.
Coming months should be more constructive for the lead market in the view of Barclays, as China is entering a seasonal period of stronger battery replacement demand and this should tighten the market. Given lead demand is more resilient to slowing conditions than any other metal, the group suggests a strong performance could be justified.
Barclays is forecasting an average price for the December quarter of US$2,250 per ounce, while average annual price forecasts stand at US$2,466 per tonne this year and US$2,506 per tonne in 2012.
While nickel prices have moved between US$18-20,000 per tonne in the past few weeks, Barclays notes fundamental data flow continues to offer clearer and more price supportive signals. LME stocks continue to fall and Chinese import demand has been strong.
Barclays expects this tightening in the market is likely to remain the case until the first half of next year, so prices should be well supported. Forecasts reflect this, with Barclays expecting average prices this quarter of US$20,500 per tonne, US$23,402 per tonne for 2011 as a whole and US$21,125 per tonne for 2012.
The standout performer among base metals over the past month has been tin, Barclays putting this down to Indonesia banning exports and a fall in LME stocks of just over 20% since the end of September. If current market dynamics continue LME stocks may become even more depleted by the start of 2012.
But Barclays is cautious with respect to such an assumption as it sees scope for market tightness to ease in coming weeks. This implies modest price increases, Barclays forecasting annual average prices of US$26,725 per tonne this year and US$28,000 per tonne in 2012.
In contrast to tin, zinc has been the worst performed base metal since the start of October, though Barclays does suggest prices appear to have found some relatively solid support at prices around US$1,900 per tonne.
With zinc having a larger market surplus than the other base metals, more constrained price performance is no surprise and is most likely to continue in the view of Barclays. The group is forecasting an average price of US$2,050 per tonne for the December quarter and US$2,229 per tonne for 2011 as a whole, rising to US$2,300 per tonne in 2012.
The fall in gold prices from more than US$1,900 per ounce to less than US$1,550 per ounce was met with higher physical demand and Barclays expects such demand will continue to cushion any downside prior to a pick-up in investment demand.
With speculative long positions also lower there is now a cleaner base from which fresh longs can be established, so Barclays expects the gold price will rise to an average of US$2,000 per ounce next year. This compares to a forecast of US$1,619 per ounce for this year.
Silver prices have also drawn some support from higher physical demand, but Barclays suggests more investment demand is required for prices to really gain traction. Downside at present appears to be limited by still solid Chinese demand. Barclays is forecasting annual average silver prices of US$37.20 per ounce this year and US$35.00 per ounce in 2012.
After falling sharply in September and early October, platinum prices have slowly started to recover to levels a little above the average cost of production. Chinese imports remain solid, physical demand picking up as prices weakened Barclays is forecasting annual average prices of US$1,778 per ounce this year and US$1,835 per ounce in 2012.
Palladium prices have broadly tracked platinum prices over the past two months, but going forward Barclays notes the metal lacks the same potential cost support as platinum given it is produced as a by-product.
Continues disinvestment in palladium has swung the market balance into a surplus and this is weighing on prices in the view of Barclays. The group's price forecasts for 2011 and 2012 stand at annual averages of US$758 per ounce and US$860 per ounce respectively.
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