In its latest Base Metals One Year Forecast report, GFMS says “our preferred economic indicator, the OECD composite Leading Indicators, is still pointing in the right direction for a broad-based recovery in base metals demand. It rose to 103.6 in January from 102.8. Growth was seen in G-7 category (103.6 from 102.8). The major Asia 5 category increased from 102.5 to 102.9.

“Aluminium is vulnerable to a correction given the massive over-supply. The fact that some of this material is tied up in long-term financing deals remains supportive, but we expect aluminium will underperform the rest of the sector in 2010.

“Although the tragic events in Chile were unexpected, it does highlight the uncertain and volatile nature of the supply. Demand growth is also starting to improve. Our recent research trip to China suggest that the unreported copper stockbuild is towards the low end of expectations, closer to 500,000 t rather than 1.5 Mt.

“Despite the return of the Magellan mine we view lead’s fundamentals more favourably than zinc. Nickel has once again displayed its huge volatility with fund interest and more importantly fundamental support from a pick-up in demand from stainless, lower stocks and further deals at Goro. Tin should be supported by on-going supply concerns in Indonesia and China, and a likely improvement in the demand from the electronics sector.

“Our general view on the base metal markets is that 2010 would prove to be a year of consolidation after the exceptional gains seen in 2009. The ‘early’ increase in prices last year came about for a number of reasons.

“Prices briefly fell below the marginal cost of production and the response of producers to the development was much more swift than in previous cycles and output was quickly cut back. Partly related to the above, but also more importantly as a wider part of asset diversification, commodities were still viewed favourably compared to other asset classes.

There was exceptionally strong buying from China reflecting a combination of factors – SRB purchases, speculative buying due to low prices in late 2008 and early 2009, against (importantly) a background of strong underlying demand growth. Demand was exceptionally weak in the mature economies in 2009 with declines typically in the order of 20%.

“The above developments took place against a generally weakening dollar, which provided further support to prices. The supply side also kicked in with tightness at the concentrate stage particularly for the copper and lead markets.

“Some of the factors will be absent this year (price related cutbacks and the dollar has also strengthened.) The GFMS base metal index has rallied from the early February low of 249.24 to close to 295 in early March, partly on the recovery in demand from the mature economies that is beginning to emerge. GFMS generally expects that 2010 will generally be year of consolidation of prices after the massive gains seen last year.”