RBC Capital Markets forecasts copper demand growth of 3.6% in 2011, 5.5% in 2012, 5.6% in 2013, and trend growth of approximately 4.0% in 2014 and 2015. Molydenum growth is forecast at 8.4% in 2012 and 8.8% in 2013, before settling back to trend growth of a little over 5.0% in 2014 and 2015. For nickel the forecast growth is 9.5% in 2012, 10.3% in 2013, and trend growth of approximately 5.0% thereafter. Finally for zinc, RBC says growth of 5.9% in 2012 and 6.0% in 2013, followed by trend growth of 3.1% in 2014 and 2015.

Global copper demand grew by 8.4% in 2010 after declining 0.8% in 2009. Western World demand grew by 8.7% while growth in China slowed to 7.4%. “We expect Western World demand to decline by 0.1% in 2011 with the end of restocking and Chinese growth to increase to 9.7%. While leading indicators continue to point to slowing economic growth, we have so far factored only a modest slowing in growth in the US and low but positive growth in Europe into our analysis. We forecast growth of 3.6% in 2011, 5.5% in 2012, 5.6% in 2013, and trend growth of approximately 4.0% in 2014 and 2015.”

RBC analysis suggests that in 2009, refinery capacity utilisation rates fell to levels not seen since the early 1980s. Restricted mine and scrap supply constrained refined production in 2009, and mine disruptions remained a constraint in 2010. Despite ongoing mine constraints, global refined production growth rebounded to 4.2% in 2010. “We estimate production grew by a further 4.7% in 2011. We forecast growth of 8.1% in 2012, 3.6% in 2013, and 4.8% in 2014. In 2015, we forecast growth of only 3.0% due to a shortage of mine supply. Mine capacity remains the bottleneck.

“We expect inventories to increase modestly in 2012 and then to decline on trend throughout the remainder of our forecast period, supporting historically strong pricing. We estimate that the market was in a deficit in 2011 although reported inventory changes suggest a balanced market. A small forecast surplus in 2012 should lead to an increase in inventories and limit any price increases. In 2013 and beyond, we expect renewed deficits to draw inventories down below critical levels, supporting strong price increases. In 2015, inventories are forecasted to drop to minimum levels, thereby driving prices to levels that would restrict demand in order to balance the market.”

In pricing, the copper market remains tighter than the other base metals. Inventories are relatively low, there is little excess mine capacity, and mine utilisation rates remain high, thereby supporting strong pricing. “We forecast a modest correction in 2012 on the back of our forecast surplus. However, we expect prices to increase to new highs in 2013 and beyond in what we expect will be a very tight market. Copper remains our preferred base metal. However, there is significant downside price risk in the event of a global economic downturn. We forecast an average price of $3.50/lb in 2012, $4.00/lb in 2013, $4.25/lb in 2014, and $4.50/lb in 2015. Our long-term price forecast is $2.25/lb in 2011 US dollars.

The risks to these forecasts are:
Economic Growth – A 1% decrease in forecasted 2012 global demand would decrease our forecast growth rate to 4.4% from 5.5% and increase the forecast surplus by over 200,000 t.
Investment Demand – Investment demand remains a key driver of commodity prices, leaving prices vulnerable to increased volatility.
China – Slower demand growth in response to government measures to cool economic growth could increase the forecasted 2012 surplus.
Supply – A higher level of production disruptions and hence lower operating rates than we currently assume could limit supply to levels below the current forecasts.

After a decline of 9.9% in 2009, global molybdenum demand rebounded by 14.6% in 2010 on the strength of restocking in the developed world. China has been the main driver of growth in molybdenum demand over the past five years and RBC expects this to continue throughout its forecast period. “We estimate demand grew by 6.2% in 2011, and we forecast growth of 8.4% in 2012 and 8.8% in 2013, before settling back to trend growth of a little over 5.0% in 2014 and 2015.

“We forecast a dramatic acceleration in mine production growth throughout our forecast period, as new projects, both primary and secondary, come on stream. After rebounding strongly in 2010, we estimate that global mine production declined by 3.0% in 2011. We forecast growth of 5.0% in 2012, 3.4% in 2013, 8.6% in 2014 and 8.9% in 2015.

“We estimate that the market was in surplus for the fourth year in a row in 2011. However, we expect the market to move into deficit in the second half of 2012 and become very tight in 2013 and 2014. Our analysis continues to suggest that projects delayed in the 2008/2009 downturn will not allow supply to keep up with the growth in demand in the medium term.

“We forecast deficits of 2 Mlb in 2012, 34 Mlb in 2013, and 15 Mlb in 2014. Assuming that current production plans are met, we expect the market to face a large and growing surplus beginning in 2015 and beyond.

“We remain quite positive on the prospects for significant molybdenum price increases over the next two to three years. However, we do not believe that a significant increase in molybdenum prices is likely before the second half of 2012. After increasing in the first two months of 2011, prices were under downward pressure through most of the rest of 2011. From a high of $17.75/lb in February of 2011, prices declined to a low of $12.60/lb at the end of October. Prices rallied modestly in the last two months of 2011 to finish the year at $13.30/lb and currently stand at $13.75/lb. We forecast an average price of $17.50/lb in 2012, rising to $25.00/lb in 2013 and $20.00/lb in 2014, before falling back to $15.00/lb in 2015 in the face of our forecast growing surplus. Our long-term price forecast remains $11.00/lb in 2011 US$ terms.”

The risks to these forecasts are:
Economic growth – While leading indicators continue to point to slowing growth, RBC has so far factored only a modest slowdown in the USA and low but positive growth in Europe into its analysis. Slower growth than currently forecasting could increase the forecast surplus in 2012.
China – Slower demand growth in response to government measures to cool economic growth could delay a significant price increase until 2013.
Supply growth – Difficulties or delays in starting up new projects could limit supply, leaving the market tighter for longer than forecast.

After three consecutive years of declines, global nickel demand grew by 18.0% in 2010. Western World demand grew by 11.8%, while growth in China accelerated to 29.9%. RBC expects Western World demand to decline by a modest 0.3% in 2011 and Chinese growth to slow to 19.4%. While leading indicators continue to point to slowing economic growth, it has so far factored only a modest slowing in growth in the US and low but positive growth in Europe into its analysis. It estimates demand grew by 7.5% in 2011, and forecast growth of 9.5% in 2012, 10.3% in 2013, and trend growth of approximately 5.0% thereafter.

Global refined production increased 9.5% in 2010 after declining for two years in a row. The return to work at Vale’s Canadian operations after lengthy strikes and continued growth in nickel pig iron production in China were largely responsible for the rebound. Supply growth moderated in 2011 as new projects were delayed. But despite ongoing problems, RBC expects new projects to begin to make a significant contribution to supply in 2012. On top of that, and despite declines in the latter part of 2011, nickel pig iron production could be running at much higher rates than currently forecast. RBC estimates supply grew by 6.4% in 2011, and forecast growth of 12.3% in 2012, 9.8% in 2013, 5.1% in 2014, and 4.6% in 2015.

“While the market was in deficit in the first half of 2011 on the back of strong demand and production disruptions, we estimate that the market moved into surplus in the fourth quarter of the year as production increased and demand stalled. Our analysis suggests that inventories will remain well above the critical level throughout our forecast period. Our forecasted growth in demand in 2011 and beyond looks likely to be matched by increases in supply, leading to balanced markets and no significant drawdown in inventory.

“With the market expected to be in surplus for the remainder of our forecast period, we expect marginal costs to be a key determinant of prices. Based on the historical inventory/price relationship and our cost work, we see fundamental price support in the $8.50/lb to $9.00/lb range. In 2012 and 2013, we expect prices to remain within this range to limit production increases and balance the market. We forecast an average price of $8.25/lb in 2012, $9.00/lb in 2013, $10.00/lb in 2014, and $11.00/lb in 2015. Our longterm price forecast is $8.50/lb in 2011 US$.

The risks to these forecasts are:
Economic Growth – A 1% decrease in forecast 2012 global demand would decrease our forecast growth rate from 9.5% to 8.4% and increase forecast surplus by 17,000 t.
Investment Demand – Investment demand remains a key driver of commodity prices, leaving prices vulnerable to increased volatility.
China – Slower demand growth in response to government measures to cool economic growth or higher nickel pig iron production could increase forecast surplus in 2012.
New Capacity – Delays or difficulties in bringing new projects (many of which rely on new technologies) on stream could result in tighter markets and higher prices than currently forecast.

Finally, global zinc demand grew by 15.3% in 2010. Western World demand grew by 15.1% while growth in China accelerated to 15.0%. “We expect Western World growth to slow to only 0.5% in 2011 and Chinese growth to decrease to 2.2%. While leading indicators continue to point to slowing economic growth, we have so far factored in only a modest slowing in growth in the US and low but positive growth in Europe into our analysis. We estimate global demand grew by 1.2% in 2011, and forecast growth of 5.9% in 2012 and 6.0% in 2013, followed by trend growth of 3.1% in 2014 and 2015.

“Global refined zinc production rebounded by 13.7% in 2010 after declining 4.1% in 2009. We estimate supply grew by 2.1% in 2011, and forecast growth of 4.4% in 2012, 3.7% in 2013, and 4.0% in 2014. In 2013 and 2014, we expect mine closures to begin to constrain supply, and by 2015 we forecast a decrease in refined zinc production of 0.6% as supply is limited by concentrate availability.

“The global zinc market recorded a surplus of 282,000 t in 2010, the fourth straight year of surplus and we estimate the market was in surplus again in 2011. We forecast inventories to peak in 2012 and remain at historically high levels until 2015, when we expect an acute shortage of concentrates to leave the market in a large deficit and result in a sharp drawdown in inventories. Our forecast rebound in demand should be matched by rising mine production in 2012, leaving the market in surplus. In 2013 and 2014, we expect mine closures to begin to constrain supply, leaving the market balanced although with inventories at historically high levels. In 2015, we expect a shortage of mine supply to result in a large deficit, drawing inventories down significantly.”

The zinc price remains above the bottom of its historical range in real terms compared to inventories as weeks of consumption. With inventories high, capacity utilisation less than full effective rates, and the market in surplus, the fundamentals do not justify current price levels. In a surplus market, the marginal cost of production would normally be expected to be a key determinant of prices. The RBC cost analysis and the historical inventory/price relationship suggest fundamental price support around $0.70/lb, pointing to further downside risk from current levels. “We forecast an average price of $0.90/lb in 2012, $1.00/lb in 2013, $1.30/lb in 2014, and $1.50/lb in 2015. Our long-term price forecast is $0.90/lb in 2011 US$.

The risks to these forecasts are:
Economic Growth – A 1% decrease in forecast 2012 global demand would decrease the forecast growth rate from 5.9% to 4.8% and increase forecast surplus by 134,000 t.
Investment Demand – Investment demand remains a key driver of commodity prices, leaving prices vulnerable to increased volatility.
China – Slower demand growth in response to government measures to cool economic growth could result in a larger surplus in 2012.
Supply – Higher mine capacity than currently forecast, particularly in China, could result in larger surpluses in 2011 and 2012 and leave the market in surplus in 2013 and beyond.