Two key concerns have been dominating the base metals market: the escalating sovereign debt crisis in Europe and uncertainty regarding the impact of the measures by Chinese authorities to curb excessive credit creation, which put substantial downward pressure on base metal prices during the second quarter. However, much of the bad news seems now to have been priced into the market, with prices trending higher in July from the depressed levels of early June.
Chinese production of non-ferrous metals and steel registered sharp gains during the first half of 2010. Gains were generally more than 20%, with the increase for aluminum closer to 50% despite repeated efforts by the central government to curb output.
A supply-demand analysis sees the aluminum market surplus declining this year before drifting toward broad balance in 2011. IAI and LME stocks are slowly starting to trend lower, suggesting the global supply/demand imbalance is becoming less extreme. Natixis Commodity Markets has forecast prices to average $2,148/mt this year followed by $2,400/mt in 2011.
Refined copper production should increase by 4.4% year-on-year, to exceed demand by 150,000 mt, which would see the surplus being just one fifth of last year’s figure. In 2011, consumption will finally “catch up” with supply, culminating in the first annual deficit since 2007 of around 65,000 mt. The gradual improvement of the copper market is driven primarily by the tightness at the concentrate stage. Substantial gains could be achieved later in the year as the picture for 2011 becomes clearer, which should boost the annual average to $7,230/mt, followed by $8,300/mt in 2011.
For the lead market, the inventory accumulation in this cycle remains relatively small, with LME and Chinese stocks representing less than three weeks of consumption, which is among the lowest of the base metals. With a small surplus of just under 100,000 mt, Natixis envisages a return to deficit of around 100,000 mt in 2011. This scenario should support a second half average of $2,050/mt, which in turn implies an average for this year of $2,041/mt. A return to deficit in 2011 should allow average prices to reach $2,250/mt.
Natixis is projecting an average annual price of $20,994/mt in 2010 and another deficit in 2011. However, the potential for higher Chinese nickel pig iron production may cap the average price next year at $23,000/mt.
The speed and extent of the supply side recovery for tin has been restricted by the ongoing problems faced by Indonesian smelters, which look set to continue. When combined with a continued demand side recovery, the tin market will record a 4,000 mt deficit over 2010 that should support an average price of $18,250/mt. If supply growth remains limited next year, the deficit should widen to around 11,000 mt, helping to push average prices to $19,750/mt.
The increase in zinc output in both China and Europe means the surplus this year should be around 300,000 mt. Given solid Chinese demand growth, and with prices close to production costs, downside potential is limited. Natixis is forecasting a full year average of $2,114/mt.
The market should move to a 109,000 mt deficit in 2011 thanks to the eventual recovery of the construction sector. Global zinc production growth will slow to 3.5%, in part affected by the closure of the Brunswick mine, which will restrict concentrate availability over the second half of 2011, and which should allow an average price of $2,500/mt.
This report, provided by Natixis Commodity Markets (London), www.natixis.com, was based on the company’s latest report: NCM Metals Review Third Quarter 2010.
