Commodities | Feb 16 2007
By Chris Shaw
Following weakness in January base metals prices have staged something of a recovery this month, an outcome in line with the expectations of National Australia Bank. The bank suggests much of the falls last month were related to concerns over speculative losses and hedge funds getting into trouble and so were not reflective of underlying supply and demand conditions.
Indeed, the bank sees some positive factors for commodity prices in the short-term, as it expects Chinese buying will again emerge following the completion of celebrations for the Chinese New Year.
This buying should support prices in what are already tight markets, which have been characterised by disappointing supply side growth. The bank suggests being selective though as there are signs of divergence across the metals as aluminium and lead are expected to record surpluses this year, copper and nickel should be closely balanced while the zinc market should remain in deficit.
Looking more closely at each metal, the bank suggests the outlook for aluminium prices is less than perfect, as increasing stockpiles of the metal and signs the market balance is moving towards a surplus suggest weakening fundamentals.
This surplus is being driven by expanding Chinese production, which is gaining a boost from lower alumina prices. As a result the bank expects global output to increase 6.7% this year, resulting in a surplus of around 200,000 tonnes of the metal. This generates an average price forecast of US$2,382 per tonne, down 7.2% from 2006.
Copper prices are also tipped to move lower, the bank estimating prices will average US$6,308 per tonne in 2007, down 6.2% from last year. Its view is shaped by its forecast of a 4.2% increase in global consumption to 17.9m tonnes, compared to a 3.8% increase in supply to 18.1m tonnes. On the plus side, the bank notes a small deficit for the year remains possible as Chinese consumption should increase following recent de-stocking.
Lead prices are also predicted to trend lower over the course of 2007, as while consumption is tipped to grow by 2.6% to 8.21m tonnes supply should lift by 3% to 8.27m tones, the result being a small increase in stocks. The bank expects prices to average US$1,385 per tonne this year, up 7.7% from 2006 but with prices in the December quarter well below current levels and slightly below last year’s average price.
Supply side issues continue to support the nickel price, as stockpiles have fallen at the same time as demand remains strong. For the year the bank sees consumption increasing 5.8% to 1.45m tonnes, while supply is tipped to increase 7.4% to the same amount. This suggests a relatively balanced market, but in the bank’s view its forecast of an average price of US$35,060 per tonne has upside risk given further potential supply disruptions.
Zinc has the most favourable outlook among the metals, though the bank notes its prospects are tempered somewhat by the metal’s traditional close link with copper prices. It suggests while prices fell last month thanks to a surge in Chinese exports, this can be attributed to a change in that country’s tax system rather than a fundamental change in the market’s outlook.
The bank’s numbers suggest consumption increasing 2.6% to 11.35m tonnes, compared to a 4.9% increase in supply to 1.2m tonnes and so suggestive of a further shortfall in the market. As a result, NAB is forecasting a 25% increase in the average price this year to US$4,088 per tonne.