Commodities | Feb 28 2011
– High Chinese growth expectations built into base metal prices
– Short-term correction is possible
– Medium-term fundamentals remain supportive
By Chris Shaw
The rally in the base metals sector in recent months has seen prices for all metals with the exception of aluminium return to pre-GFC levels. According to Credit Agricole, the gains reflect increasing optimism with respect to global growth prospects, a view supported by Natixis Commodity Markets. Natixis also points out higher prices are being supported by base metal markets gradually shifting from surplus to deficit.
Natixis suggests one important element for base metal prices going forward will be the ability of developing countries to control domestic inflationary pressures without impacting too heavily on growth.
Assuming only two or three percentage points of growth are sacrificed to maintain control over inflation, Natixis expects growth among the BRIC nations (Brazil, Russia, India and China) will be enough to further tighten metal markets. This is especially the case if growth in G3 nations also continues to recover.
Short-term, Natixis sees potential for commodity markets to correct lower, as at present levels high expectations for Chinese demand growth are priced in, offering scope for disappointment if these expectations are not met.
National Australia Bank tends to agree, taking the view coming months could see base metal prices consolidate. Those metals with relatively abundant global stocks may see some moderation in prices, but with fundamental demand still strong, prices are forecast to remain at high levels relative to history.
On a medium to longer-term view, Natixis remains positive on the base metal outlook. Post a short-term correction inflation rates are expected to subside and growth to return to longer-term trend levels. This combination should continue to be positive for base metal demand.
Looking at each metal individually, Natixis sees aluminium returning to a small deficit position in 2011, with a further shortfall likely in 2012. This reflects both strong global demand growth of better than 20% in 2010 according to Credit Agricole, as well as the closure of some smelter capacity in both Europe and China.
While Natixis expects demand growth to slow in 2011, there should still be a gradual downtrend in global inventories. As fundamentals improve, investment funds may be encouraged to buy the metal, offering a further potential source of demand. Any rise in energy prices would also be supportive for the aluminium price, according to Natixis.
Credit Agricole agrees there is better relative value on offer in the aluminum market as copper is currently trading at about 3.8 times the price of aluminium against a historical average of 1.5-2.0 times. This increases the potential for substitution between the two metals, something that would further support improved aluminium market fundamentals.
Credit Agricole is forecasting aluminium prices of US$2,575 per tonne this year and US$2,900 per tonne in 2012, while Natixis has base case forecasts of US2,625 per tonne and US2,700 per tonne respectively.
National Australia Bank has quarterly price forecasts of US$2,100 per tonne for both the March and June quarters this year and US$2,150 per tonne for both the third and fourth quarters. In 2012 forecasts range from US$2,125 per tonne in March to US$2,050 per tonne in December.
In trying to push through the US$10,000 per tonne barrier copper prices are being driven by rising expectations for growth, the weak US dollar and still tight concentrate markets. This combination has led to strong investment demand for the metal, notes Natixis.
Chinese apparent demand for copper rose 10% in 2010 on Natixis' numbers but appears to be slowing, this being offset by improved demand in mature economies. Substitution remains a potential issue given high prices, but the supply picture is being improved by falling grades and so relatively little growth in mine production.
Credit Agricole offers a similar argument, suggesting 2011 should see global copper consumption grow by more than trend rates of 3.5-4.0%, so driving further shortfalls in supply and inventories. Delays to new projects are also expected to increase, while short-term disruptions to existing projects are also likely. This should mean a scarcity premium for copper.
Forecasts reflect this, Natixis' base case expectations for copper prices standing at US$9,000 per tonne this year and US$9,500 per tonne in 2012. This compares to Credit Agricole at US$9,750 per tonne and US$10,500 per tonne respectively, and quarterly forecasts for National Australia Bank ranging from US$9,200-$9,400 per tonne this year and US$9,300-$8,800 per tonne in 2012.
Supply concerns were behind gains in lead prices early in January but a subsequent increase in stockpiles has seen prices retreat somewhat, Natixis noting current levels are more in line with average prices in the final quarter of 2010.
As with other metals, lead demand has been strong in developing nations but Natixis notes demand has been more muted in mature economies. This trend is unlikely to change in the medium-term. China has been a major driver of demand and in the view of Natixis this will continue as auto production and sales continue to increase.
Chinese lead production should also deliver healthy growth this year but as supply continues to struggle elsewhere, Natixis sees a further gradual tightening in the global lead market. Forecast deficits range from 63,000 tonnes this year and 168,000 tonnes for 2012.
Credit Agricole also expects inventories to decline in 2011, while the outlook is for the market to be close to balanced this year. Price forecasts from Credit Agricole stand at US$2,525 per tonne in 2011 and US$2,850 per tonne in 2012.
Natixis is forecasting average prices this year of US$2,650 per tonne and in 2012 of US$2,900 per tonne, while National Australia Bank expects quarterly prices to range between US$2,300 and US$2,320 per tonne this year and remain at US$2,300 per tonne through 2012.
The key question for nickel, according to Natixis, is can the market absorb the coming wave of new projects, with output in Canada forecast to increase and new projects in Latin America likely to lift global production.
Supply will also be lifted by Chinese nickel pig iron output, which itself is supported by high nickel prices spurring increased substitution of the metal. This is enough in the view of Natixis to suggest nickel will record a small surplus this year, which implies less than positive market fundamentals. Credit Agricole agrees, expecting nickel will underperform relative to other metals in 2011.
In terms of price forecasts, Credit Agricole has average price estimates of US$24,500 per tonne this year and US$26,000 on 2012, while base case forecasts for Natixis stand at US$24,500 per tonne and US$24,000 per tonne respectively. Quarterly forecasts for National Australia Bank range from US$24,500 to US$26,000 per tonne in 2011 and from US$26,000 in the March period to US$23,500 per tonne in the final quarter of 2012.
Fresh supply side concerns in Indonesia saw strong tin prices to open 2011 and according to Natixis this highlighted the issue of long-term under-investment in the sector. The global demand recovery remains strong, so the market is again forecast to be in deficit in 2011 and 2012.
This supports Credit Agricole's view tin is likely to be a star performer in 2011 as the supply chain becomes even more stretched. Price forecasts reflect this, Credit Agricole forecasting average prices of US$27,500 per tonne in 2011 and US$31,500 per tonne in 2012. Natixis is forecasting prices of US$29,000 per tonne this year and US$30,000 per tonne in 2012.
While zinc prices rose in the fourth quarter of last year, this came at the same time as demand strength was overwhelmed by a jump in output from Chinese producers in particular. Prices have subsequently reacted to the less impressive fundamentals as the market has become less tight than Natixis had expected.
Even though global demand growth is likely to slow to about 6% in 2011, the zinc market should still be in deficit of around 60,000 tonnes on Natixis' numbers, with a further deficit likely in 2012. Credit Agricole disagrees, expecting a surplus in 2011 on the back of good concentrate availability and solid smelter capacity.
Given less than inspiring fundamentals Credit Agricole is forecasting annual average prices of US2,475 per tonne this year and US$2,700 per tonne in 2012. Natixis expects average prices of US$2,525 and US$2,750 respectively, while quarterly average price forecasts for National Australia Bank range between US$2,350-$2,400 per tonne in 2011 and between US$2,300-$2,350 per tonne in 2012.
