2012, copper prices will remain on a broad upward trend. For 2011 our price forecast is $7,900/tonne compared to our 2010 forecast of $7,375.
Lead had been the top performer in 2009 tracking and ultimately outpacing copper all year – prices have seen a reversal in 2010. Nevertheless there are similarities with copper, in that tight raw material markets will struggle to keep up with what is a robust demand outlook for both markets. Our forecast for lead this year is $2,100/tonne. Based on ILZSG, reported commercial stock numbers, lead is the tightest base metal market, with stocks only amounting to 2 weeks of global consumption.
By this measure at least, higher lead prices are certainly easy to justify, especially as we see reported stocks declining to just 1.1 week of consumption by the end of 2012. This is as tight as copper and tighter than tin, which I shall touch on in a moment, so an equally bullish view on the outlook for lead prices may be warranted.
We would expect further price gains, and forecast a rising trend on an annual basis from $2,100/tonne in 2010, $2,560/tonne in 2011 underpinned by a supply deficit.
Aluminium & zinc
Our forecast for aluminium is $2,220/tonne for this year. Aluminium prices have been supported by a tight physical market and improved demand in comparison to 2009.
The issues for aluminium, which incidentally are also common to the zinc market are overproduction, the threat of additional idle capacity overhanging the market, and high stocks levels (much of which have gone into warehouse/financing deals).
The issues for aluminium, which incidentally are also common to the zinc market are overproduction, the threat of additional idle capacity overhanging the market, and high stocks levels (much of which have gone into warehouse/financing deals).
We expect to see the aluminium market remaining in a position of oversupply between 2010 and 2012, although the surplus will progressively decrease in size as demand starts to improve.
When we last saw aluminium prices above the $3,000/tonne level in July 2008, reported stocks were standing at around six and a half weeks worth of consumption. By the time we reach the end of 2010, this figure will be closer to 10 weeks. On top of this, we expect global capacity utilisation rates will struggle to exceed 80%, showing just how much excess capacity there is in the aluminium market.
In 2011, we expect a reduction in the surplus [to 567,000 tonnes], and a corresponding small increase in prices to $2,300/tonne with the uptrend in prices capped by the overhanging inventory and idled capacity present.
For zinc oversupply is also the key depressing factor to prices. For example, zinc mine production this year is now at record highs and there is still at least 400,000 tpy of capacity sitting idle.
Looking forward the outlook does improve with a tight concentrate market looming as major mines close in the coming years. This won’t have an impact on the balance till the middle of this decade, although we think the tightness will start to get priced in during late 2011 and 2012. Our price forecasts are: $2,160/tonne in 2010, rising to $2,750/tonne in 2011.
Nickel & tin
For nickel the realized average so far this year has been $21,190/tonne. For tin the realized year-to-date average of $18,500/tonne. In both cases, major supply disruptions have underpinned the better-than-expected performance of prices that have exceeded our initial expectations.
For nickel, the main influencing factor was the strike at Vale’s operations in Canada. And for tin, poor weather and the fallout from new mining regulations in Indonesia caused the bulk of the shortfall, while shutdowns in China due to power supply curbs recently have provided the latest boost for prices. Although we allow for disruption allowances in our forecasts, ultimately these are unforecastable elements in the markets and 2010 proved to be an exceptional year.
Nickel prices have also been supported by a long downtrend in LME stocks, and restocking by the stainless steel sector. However, these bullish forces have faded – the strike at Sudbury is over, restocking activity has slowed, and the downtrend in LME stocks was broken in late July – and the focus of the nickel market is now on the abundance of new projects looming on the horizon. We see small deficits in 2011 and 2012, but beyond that the market should in theory be comfortably supplied. As such our forecasts are for a full year average of $21,550/tonne in 2010 and $22,350/tonne in 2011
It would take some major supply disruptions to tighten the market up again to the extent that fundamentals warrant a revisit to the 2007 highs above $50,000/tonne.
Our long standing bullish stance towards tin remains unchanged. It has the biggest supply-demand imbalance of all the base metals and arguably retains the most bullish outlook. After contracting during the last three years, global refined tin consumption is expected to rebound strongly in 2010, by 14.2%.
Demand is being boosted by the underlying economic recovery, restocking in the traditional tin-consuming economies of the Western World (following Chinese restocking last year), and by concerns about future availability. We expect to see global supply deficits over the next two years, which will put stock levels at 3.6 weeks of consumption at the end of 2011 and 2.7 weeks at the end of 2012. At the last peak in prices in 2008, reported stocks were equivalent to 5 weeks of world consumption. Our forecast suggests record prices are justifiable. Our annual price forecast for 2010 stands at $19,590/tonne. For 2011, our forecast is $23,300/tonne.
Conclusions & summary of assumptions
So having just relayed our outlook for each metal I would like to summarise our key assumptions:
(1) overall global economic growth will remain on track - a double-dip recession looks set to be avoided;
(2) Eurozone sovereign debt fears have not gone away. Interestingly, however, the market appears to have become increasingly bored with the Eurozone story, particularly with the potential for QE2 in the US on the horizon;
(3) China, the real engine of growth for the base metals, remains strong. Risks that emerge, such as overheating in certain sectors creating the risk of bubbles have so far tended to be safely negotiated by policymakers. Indeed, demand growth is picking up momentum once again as we head into Q4.
(4) Restocking across the base metals in China was a major supporting factor in 2009 and while China has been destocking this year, the restocking baton has passed to the traditional Western World economies. Accordingly, apparent demand has surged spectacularly in countries like the US, Europe and Japan in the first half of 2010.
(5) Supply concerns are returning to the fore, and raw material shortages will be key themes in copper, tin and lead in the coming years. Supply shortages in these markets form the main pillars of our bullish outlook for these metals.
(6) A feature for some markets, and in particular aluminium, is that a large proportion of stocks (both on and off warrant) are tied up in warehouse/financing deals, effectively rendering them unavailable to the market. As much as 80% of LME aluminium stocks may be tied up in such deals which are being facilitated by low interest rates and steady contangos.
One final area I would like to touch on is the increasing publicity on the imminent launch of ETFs, backed by physical metal holdings. Initially, the focus is on aluminium, as it provides a home for some of the mountain of surplus metal in the system, but there is no reason why it could not be extended to other base metals. However, if ETFs prove to be successful, there is a fear among physical consumers that it could restrict the volumes available for real consumption. This of course would be another bullish factor for prices.
So overall, we are bullish on the base metals, but of course that degree of bullishness depends on the underlying fundamental dynamics of each market and as we have discussed they vary greatly from metal to metal.
(1) overall global economic growth will remain on track - a double-dip recession looks set to be avoided;
(2) Eurozone sovereign debt fears have not gone away. Interestingly, however, the market appears to have become increasingly bored with the Eurozone story, particularly with the potential for QE2 in the US on the horizon;
(3) China, the real engine of growth for the base metals, remains strong. Risks that emerge, such as overheating in certain sectors creating the risk of bubbles have so far tended to be safely negotiated by policymakers. Indeed, demand growth is picking up momentum once again as we head into Q4.
(4) Restocking across the base metals in China was a major supporting factor in 2009 and while China has been destocking this year, the restocking baton has passed to the traditional Western World economies. Accordingly, apparent demand has surged spectacularly in countries like the US, Europe and Japan in the first half of 2010.
(5) Supply concerns are returning to the fore, and raw material shortages will be key themes in copper, tin and lead in the coming years. Supply shortages in these markets form the main pillars of our bullish outlook for these metals.
(6) A feature for some markets, and in particular aluminium, is that a large proportion of stocks (both on and off warrant) are tied up in warehouse/financing deals, effectively rendering them unavailable to the market. As much as 80% of LME aluminium stocks may be tied up in such deals which are being facilitated by low interest rates and steady contangos.
One final area I would like to touch on is the increasing publicity on the imminent launch of ETFs, backed by physical metal holdings. Initially, the focus is on aluminium, as it provides a home for some of the mountain of surplus metal in the system, but there is no reason why it could not be extended to other base metals. However, if ETFs prove to be successful, there is a fear among physical consumers that it could restrict the volumes available for real consumption. This of course would be another bullish factor for prices.
So overall, we are bullish on the base metals, but of course that degree of bullishness depends on the underlying fundamental dynamics of each market and as we have discussed they vary greatly from metal to metal.
Raju Daswani
Presentation given by Raju Daswani, Managing Director Metal Bulletin, email rdaswani@metalbulletin.com
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