Commodities | Feb 12 2010
By Chris Shaw
The National Australia Bank Base Metals Index gained 5% in January, but it was strength at the beginning of the month that was the driver as the bank's specialist Ben Westmore notes prices weakened through the second half of January and into February.
This was the market response to a change in financial conditions implemented by Chinese authorities in an attempt to lessen stimulus measures in that economy, which flowed through to lower Chinese import demand for many metals in December and January.
The other factor playing on investors has been the possibility of sovereign debt downgrades in Europe and the potential for this to impact on future global demand, while Westmore suggests there has also been some concern the extent of the rebound in prices since December of 2008, and the bank's Base Metal's Index has risen 99% since then, was inconsistent with market fundamentals.
The price recovery has not been consistent across all metals as from trough prices, Westmore notes aluminium has risen by 68% and nickel by 91% but Copper and lead have both gained better than 140%.
Looking ahead, Westmore suggests developments in China will continue to be the prime driver of commodity markets given its importance as a buyer, especially while the rest of the global economy struggles to return to more traditional growth levels.
The initial reaction to the news that authorities in China were adjusting policy to prevent the formation of speculative bubbles in asset markets was negative, but Westmore sees the policy change as a positive medium-term, as the move is laying the foundation for a more sustainable growth path for the economy.
What is also supportive in Westmore's view is the expectation Chinese dwelling construction will remain robust as authorities realise they need to provide housing and infrastructure as the urbanisation of the nation continues.
In terms of the recent price activity, Westmore notes the falls in the nickel price of late have been more limited than for the other base metals thanks to industrial disputes in Canada increasing concerns about future supply levels.
This offsets to some extent what had been abundant supply levels that have limited the rise in nickel prices from the December 2008 lows, the supply threat also being enough to hold back aluminium price performance over the same period.
Another issue for aluminium in particular has been as prices have risen, higher cost production facilities have been re-started, this despite the supply overhang in the market. This increases the concern for prices going forward, especially given new smelters are also expected to come on stream in coming years.
As evidence of this, Westmore notes LME inventories remain at historical highs for both aluminium and nickel but are at long-run average levels for copper, zinc and lead. A positive across the sector noted by Westmore is reports of scare inventories along the price chain, which implies LME inventories could decline rapidly once global industrial production eventually recovers.
Across the base metal spectrum, Westmore remains of the view the recovery in activity in China will prove to be sustainable, with double digit rates of annual growth to be a typical feature of the economy for several years to come. This supports his expectation the copper, lead and zinc markets will move into deficit during 2010, which should support prices overall.
Westmore's forecasts factor in a slight correction in metal prices short-term, but on his numbers the bank's Base Metal Index is expected to rise by 12% this year and by a further 13% in 2011. One point he makes is as global macroeconomic indicators are becoming less important for metal markets, it will be specific factors in individual markets that drive price performance.
This is reflected in his forecasts, Westmore expecting aluminium prices to move from an average of US$2,003 per tonne for the December quarter last year to US$2,217 per tonne in the March quarter, US$2,166 per tonne in the June quarter, US$2,193 in the September quarter and US$2,259 in the December quarter.
For copper on the same US dollars per tonne basis, he expects averages of $7,385, $7,389, $7,539 and $7,768 for quarters one through four of 2010, which compares to an average for the December quarter last year of $6,650.
For lead he expects average prices of $2,379, $2,410, $2,468 and $2,542 respectively, up from $2,292 in the December quarter, while for nickel his forecasts are for prices to average $18,308, $17,926, $18,155 and $18,700 per tonne for each quarter of this year, which compares to $17,568 per tonne in the December quarter of 2009.
Westmore's quarterly average zinc price forecasts, again in US dollars per tonne, are $2,432, $2,408, $2,448 and $2,521, which compares to a December quarter of 2009 average of $2,217.