When Natixis Commodity Market (NCM) released its previous quarterly report, two key concerns were 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. NCM retains its positive stance towards prospects for the base metals sector.
The recovery in demand in western economies has to be viewed in the context of the exceptionally weak post Lehman environment, but nevertheless a sharper than expected rebound has been experienced in many countries. This reflects three main factors – fiscal and monetary stimuli, strong growth in developing countries and increased capital spending in mature economies by a strengthening corporate sector, which has in turn encouraged restocking. The first of these factors will progressively diminish as the second half of the year unfolds. Even without fiscal stimuli, an ultra-low interest rate environment should help to sustain the recovery in the US.
In 2009, the only developing country that mattered was China. In 2010, the developing country growth story has broadened to the other BRICs and countries such as Indonesia and Turkey.
The global automobile sector illustrates this situation very clearly. Despite lacklustre growth in developed countries once scrappage schemes had been terminated, global car production rose to new historic highs thanks to the exceptionally rapid growth in demand from consumers in developing countries. China is not the only expanding market. Russian, Indian and Indonesian sales in June were up 47%, 22%, and 78% respectively, year-on-year.
The desire of the Chinese government to rein in some of the excesses of its recent incredible growth seems to be taking effect. Industrial production and fixed asset investment have both slowed in recent months. Specifically for the base metals, destocking (the reverse of the situation in the West) has led to slower growth in demand, certainly when compared to the period of rapid restocking during the first half of 2009.
Chinese production of non-ferrous metals and steel registered sharp gains during the first half of 2010. Gains were generally over 20%, with the increase for aluminium closer to 50% despite repeated efforts by the central government to curb output. The authorities are now embarking on a more assertive set of policies that are intended to promote overall energy efficiency by curbing this energy-intensive sector, with particular focus on smaller, older, inefficient and polluting producers, as well as deterring production of energy-intensive basic industrial goods destined for immediate re-export.
The supply position outside China is more straightforward. At one extreme we have primary aluminium, with the market having to absorb significant capacity increases from the Middle East, India and Iceland, while at the other extreme we have the structural tightness that is emerging in the copper and tin markets. There are nevertheless other supply issues which could support the market – political and economic risk (notably in the African Copperbelt) and environmental risk (such as La Oroya, and a myriad of operations in China) and strike risk along the lines of the extended dispute at Vale’s nickel operations in Canada.
Aluminium; NCM’s supply-demand analysis sees the market surplus declining this year before drifting towards broad balance in 2011. Given that these projections are well below consensus, NCM takes a positive view on prices despite the remaining potential for over-supply. Long term financing deals, which could remain a feature of the market in the current low interest rate environment, mean that 70-80% of metal at exchange warehouses remains unavailable for immediate delivery. IAI and LME stocks are slowly starting to trend lower, suggesting that the global supply/demand imbalance is becoming less extreme. NCM forecast prices to average $2,148/t this year followed by $2,400/t in 2011.
Copper; NCM expect refined production to increase by 4.4% year-on-year, to exceed demand by 150,000 t, which would see the surplus being just one fifth of last year’s figure. In 2011, NCM anticipates that consumption will finally catch up with supply, culminating in the first annual deficit since 2007 of around 65,000 t.
The gradual improvement of the copper market is driven primarily by the tightness at the concentrate stage. Natixis Commodity Markets expects more price substantial gains to be achieved later in the year as the picture for 2011 becomes clearer, which should boost the annual average to $7,230/t, followed by $8,300/t in 2011.
Lead; Importantly 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 amongst the lowest of the base metals. NCM’s analysis still points to a small surplus of just under 100,000 t, but NCM envisage a return to deficit of around 100,000 t in 2011. In terms of prices, this scenario should support a second half average of $2,050/t, which in turn implies an average for this year of $2,041/t. A return to deficit in 2011 should allow average prices to reach $2,250/t.
Nickel; In terms of price projections, NCM have scaled back our forecasts following the correction from the early second quarter high of over $27,500/t. However, NCM remain fairly optimistic in that further downside potential is limited as the ongoing market deficit progressively erodes stocks. The company projects an average annual price of $20,994/t in 2010. NCM forecast another deficit in 2011. However, the potential for higher Chinese nickel pig iron production may cap the average price next year at $23,000/t.
Tin; The speed and extent of the supply side recovery has been restricted by the ongoing problems faced by Indonesian smelters, which look set to continue. When combined with a continued demand side recovery, NCM expect the tin market to record a 4,000 t deficit over 2010 that should support an average price of $18,250/t. If supply growth remains limited next year, the deficit should widen to around 11,000 t, helping to push average prices to $19,750/t.
Zinc; The increase in output in both China and Europe means that the surplus this year should be around 300,000 t in 2010. Given solid Chinese demand growth, and with prices close to production costs, downside potential is limited. NCM forecast a full year average of $2,114/t.
The company forecast the market to move to a 109,000 t deficit in 2011 thanks to the eventual recovery of the construction sector in developed economies, after three years of extreme contraction. In addition, NCM expect global zinc production growth to slow to 3.5%, in part affected by the closure of the huge Brunswick mine, which will restrict concentrate availability over the second half of 2011, and which should allow an average price of $2,500/t.
Base metal price outlook 2008 to 2011
% Change
2008 2009 2010 2011 10/09 11/10
Al 2,571 1,668 2,148 2,400 28.8% 11.7%
Cu 6,952 5,164 7,230 8,300 40.0% 14.8%
Ni 21,029 14,700 20,994 23,000 42.8% 9.6%
Pb 2,085 1,726 2,041 2,250 18.3% 10.2%
Sn 18,499 13,593 18,250 19,750 32.4% 8.2%
Zn 1,870 1,659 2,114 2,500 27.4% 18.3%