Commodities | Nov 24 2010
By Chris Shaw
Fundamentals may be most impressive for copper and tin among the base metals, but Barclays Capital suggests there are also some supportive indicators for aluminium prices in the short-term at least.
On Barclays' forecasts the aluminium market should record a deficit of as much as 556,000 tonnes this quarter, before returning to a broadly balanced market for the first half of 2011. The market is expected to be a little softer in the second half of 2011.
Given such expectations Barclays is forecasting average aluminium prices of US$2,480 per tonne in the fourth quarter of 2010, rising to US$2,575 per tonne in the first half of 2011. Given prices closed overnight at US$2,252 per tonne these forecasts imply some upside in coming months.
What has brought about a more bullish scenario for aluminium prices according to Barclays is better than expected demand over the course of this year, which globally is up 19% year-to-date. With global growth momentum expected to remain solid into next year, this recovery in aluminium demand should continue.
What offers an additional boost next year in the view of Barclays is an expectation China will reverse its aggressive de-stocking cycle of this year. When lost production from power production curbs are also factored into the China equation, short-term fundamentals for the metal are looking much more positive.
For Barclays, this suggests stronger prices in coming months, with the risk-reward profile for aluminium the pick of the base metals at present in the group's view.
Credit Suisse in contrast remains positive on the outlook for copper prices, suggesting scarce mine supply continues to tighten the market for the metal. While supply will receive a boost from new projects coming on-line and from substitution, prices are still expected to move higher thanks to a deficit in the market.
On its forecasts Credit Suisse suggests 2011 is likely to be the tightest period for the market, where demand needs to reduce by around 250,000 tonnes to match available supply. Substitution could see consumption cut by as much as 500,000 tonnes, allowing the market to move towards a balanced position without severe demand destruction.
On a 12-month view Credit Suisse suggests prices could peak at more than US400c per pound. This positive view is in line with that of Goldman Sachs, which sees demand growth continuing to outpace supply to the extent the market remains in gradually widening deficit through 2014.
Fro an expectation of a deficit of 121,000 tonnes this year, Goldman Sachs sees copper market deficits widening to 214,000 tonnes in 2011, 260,000 tonnes in 2012 and 354,000 tonnes by 2014.
Such a scenario supports the price forecasts of Goldman Sachs, which are for average annual prices of US406c per pound in 2011, US415c per pound in 2012, US420c per pound in 2013 and US425c per pound in 2014. This equates to prices in US dollars per tonne of around $9,000 in 2011, $9,300 in 2012, $9,400 in 2013 and $9,500 in 2014.
In the view of Goldman Sachs, a possible alternative scenario to one of gradual price increases is for a larger deficit in 2011 to generate a spike in prices, before a subsequent collapse as substitution of the metal increases.
The good news for investors, according to Goldman Sachs, is that even under such a scenario prices would need to firstly move considerably higher before any substitution event and price collapse would occur. This means being invested in copper remains a good option as the early stages of such a cycle play out.
Under either of its scenarios Goldman Sachs remains positive on copper, the metal remaining its preferred base metal for equity exposure by some margin.
Looking more closely at China, RBS notes trade data for October showed a general decline in commodity imports. Among the base metals refined copper imports were down 30% in month-on-month terms to 170,000 tonnes, while in the bulks iron ore imports fell 13% month-on-month and net coal imports were down 17% month-on-month.
While risk aversion on the back of the Irish sovereign bail-out has impacted on commodity prices in recent sessions, RBS suggests an even more significant impact could come from a tightening of economic policy in China and the sale of commodities from strategic state stockpiles.
There is evidence of some sales from these stockpiles in November as Chinese authorities attempt to curb commodity price inflation, and still significant private sector stocks mean further selling is possible in the view of RBS.
If this selling was to be sustained it could weigh on base metal prices in coming months, while the broker suggests the introduction of any further tightening measures in China could weigh on industrial demand for base metals in 2011.
This leads RBS to suggest while the medium-term outlook for commodities remains positive, more attractive buying opportunities could present themselves between now and the end of the year. RBS suggests investors look for a pullback in prices to establish fresh long positions.
Also in China, Macquarie has been in Shanxi to look at the state of coal markets in the region and returned from the trip comfortable with its view on thermal coal prices. Gains in recent weeks reflect some re-stocking and higher transportation costs and leading into winter prices are anticipated to remain at high levels.
Further strong price gains may be more difficult though, Macquarie noting government concern with respect to reigning in inflationary pressures at present are likely to keep prices in check to some extent.
In steel, Macquarie notes World Steel Association data for October held few surprises, with production volumes continuing to show a slow, steady recovery. Steel gained in month-on-month terms, but an ongoing divergence in output trends between China and the rest of the world meant pig iron volumes were flat.
China's share of total pig iron output has now fallen to around 55% now from 60% at the start of 2010 on Macquarie's numbers, with South Korea and Taiwan taking up much of the slack. This means Asia continues to lead the way in the pig iron market in particular and the steel market in general, a trend Macquarie expects will continue in coming years.
