Commodities | Dec 01 2006
By Greg Peel
National Australia Bank’s base metal index hit a new monthly record in October. Following the correction we had to have, the song remained the same as China and East Asia drove demand while the supply side response remained lackadaisical. Nickel and zinc led the team back to previous highs.
The supply side is not out of the woods yet, with production-hampering delays refusing to go away. BHP Billiton’s (BHP) Ravensthorpe nickel mine is the latest to announce delays of up to six months. “Stock coverage”, meaning the amount of metal held in inventories against immediate consumption, remains tight. Hence markets remain delicately susceptible to supply disruptions.
Nevertheless, forecasts suggest the supply side will pull its socks up in 2007, with production increases expected across the spectrum, with the exception of zinc. While demand will still be strong, the balance will not be as critical as in past years. The slowdown in the US will not prove material against Asian demand, and hence NAB expects a drift off rather than a slide.
Year-on-year to October, aluminium was up 37%. Now that cost pressures have eased considerably – oil is 18% lower but the price of alumina has crashed – production is expected to build. China increased aluminium production over the same period by 18% (rest-of-world 2%), and forecasts suggest 2006 will see a 22% increase in alumina production. Global aluminium production is forecast to increase by 4.8% in 2007.
Up to August 2006, global aluminium consumption increased by 5.6%, almost all of it in China. That is tipped to ease to 4.0% in 2007, thus resulting in a slight surplus. NAB is forecasting an average 2007 price of US$2325/t, down 8.5%.
Year-on-year to October, copper rose 89% before easing slightly as inventories increased. Global consumption rose 2%, led by a European rise of 12%. China’s consumption, however, has eased by 6.9%. Refined copper production in China is up 23%.
Global production growth is forecast to be 3.8%, while consumption should be 4.2%, suggesting a tight market. NAB is forecasting a 2007 average price of US$6875, which is actually a slight increase, but the analysts expect the spot price to decline across the year, and continue to fall in 2008 as production builds.
Year-on-year to October, the nickel price was up 49%. A recovery in the stainless steel market strained inventories. Stainless steel output increased 6.5% globally from late 2005 to record levels. China’s production was up 44%.
2007 consumption is forecast to increase by 5.8%, with production growing 7.4%. While China will still drive demand, higher nickel prices are leading to production of lower-nickel stainless steel and the increasing use of scrap nickel. However, BHP’s Ravensthorpe delay, and delays in New Caledonia, provides downside risk to the production forecast.
Thus while the numbers indicate a surplus emerging, and a subsequent fall in price, NAB is playing the delay card by suggesting nickel prices will in fact average 11% higher in 2007, at US$26750/t, with the same later drift.
Year-on-year to October, the zinc price was up 132%. Galvanised steel production has rebounded, and producers are struggling to expand.
While zinc had tracked closely with copper all year, it broke away in October with a spurt of 12% due to rapidly declining stockpiles.
The market is forecast to remain in deficit, with consumption increasing by 2.6%, with China to account for 30%. Production is forecast to increase by 4.9%, so the shortfall will actually shorten. But a deficit is a deficit.
NAB is forecasting an average zinc price of US$4900/t, up 49%.