Natixis Commodity Markets' First Quarter Metals Review
The Outlook for Base Metals
2009 was characterised by massive advances in prices, which occurred well in advance of an improvement in the visible fundamentals noted London-based Natixis Commodity Markets Ltd. It states in their First Quarter Metals Review - The Outlook for Base Metals: "From a fundamental perspective, the key price drivers are normally the rate of demand growth and the level of inventories, with supply side factors such as strikes and technical problems tending to have a more temporary impact on prices. Last year, there was a reversal of the "norm" with demand and inventories taking a back seat and supply issues being more important, while the role of the investment community came to the fore." Here is the outlook and price forecasts by Natixis for Aluminum, Copper, Lead, Nickel, Tin and Zinc:
2010: A Return to Fundamentals?
• Will funds lose their appetite for base metals? Although it is difficult to double guess the funds, many of the factors that attracted investors to the base metal sector are still in place. Base metals as an asset class continue to gain acceptance. The sector is increasingly being seen as part of the diversification of asset allocation. Many investment funds also see base metals as a play on China, and on the recovery in global economic activity, while others focus on the individual fundamentals, which is particularly relevant for copper with its looming structural tightness.
Further investment interest in 2010 is likely to be generated by the acceleration in economic growth in Asian developing countries as well as potential recovery in OECD economies. We therefore expect that investment funds will maintain their long-side bias. The only reasons for a degree of caution are the exceptional gains seen in 2009, which have left prices well in excess of marginal production costs. This could potentially lead to bouts of profit-taking (as seen in late January and early February of this year), but it is unlikely to precipitate a mass exodus from the sector.
• Chinese expansion overshadows lacklustre growth in the mature economies. China has been the dominant demand factor driving the base metal markets in recent years. The latest economic data, the figures relating to activity in downstream markets, as well as the anecdotal evidence we monitor all remain positive. Industrial production has slowed marginally but the latest figures for December still show growth at close to 20% year-on-year. In terms of the BRICs, India has the largest growth potential for base metals demand outside China. Natixis Commodity Markets views Indian economic prospects as positive. Industrial production surged in December (up 16.9% y-o-y and 10.9% m-o-m). With industrial production growing at a record pace, capital goods production surging, business confidence high and foreign direct investment returning, there are now a number of signs that private investment is set for strong growth. But it would be wrong to focus too narrowly on only one or two developing countries: industrial production across a broad range of Asian developing countries was accelerating rapidly during 2009Q4, and we would expect this to continue heading into 2010.
• Aluminum. After a 1.56m tonne surplus in 2009, Natixis Commodity Markets project a smaller 532,000 tonne surplus this year. That the market will remain in surplus is largely due to a 9.5% rise in production to around 40.6m tonnes as new capacity comes on stream in China and the Middle East. The fact that the surplus is not larger is thanks to expected demand growth in China, and also improving consumption in the OECD countries, which could lead to a 13% increase in global usage this year to 40m tonnes. This expected recovery in demand, buoyed by continued investor interest in the metal, should help support prices around an average of $2,370/tonne over 2010.
• Copper. We expect the market's fundamentals will improve during 2010, with a rebound in mature economy demand being a key driver. Chinese growth should continue to support the bottom line, and we see global usage rising by 8.4%. Furthermore, the tightness on the supply side will remain a feature with continued potential for industrial action, low output due to a lack of investment earlier in the decade and lower ore grades. Consequently, after seeing an estimated surplus of 393,000 tonnes in 2009, we are forecasting that the global balance will move into deficit this year, albeit a relatively small one at 142,000 tonnes. As a result of the improving fundamentals, we expect prices to remain strong and average $7,885/tonne over 2010. The tightness will remain for the foreseeable future, and we forecast prices to continue this upward trend in 2011, averaging $8,476/tonne for the year.
• Lead. Lead's immediate fundamentals remain positive. Chinese demand should remain strong, and demand from the Western World is believed to have recovered in line with an improvement in battery demand. Chinese production is likely to be affected over the start of the year on tight concentrate availability and stoppages caused by cold weather and environmental upgrading. Our average price forecast for 2010 is for $2,565/tonne. Stocks have not been replenished to a great extent over the last two years, so we are entering another period when we could have a new run of multi-year deficits. Consequently, we expect prices to remain strong through 2011, averaging $3,075/tonne.
• Nickel. Our analysis of the fundamentals suggests that the market will finally return to deficit in 2011. Natixis Commodity Markets believes that a sharp demand-side recovery should limit the 2010 surplus to 16,000 tonnes. We expect nickel demand to rebound by as much as 10.3% this year, with much of it expected to take place in the second part of the year. However, it must be remembered that this will be taking place from a low base. While nickel prices are steered by the investment community in the early months of the year, we believe that the fundamentals will take over thereafter. In our view this should see prices increase further particularly as demand picks up. As a result, Natixis Commodity Markets forecast an average annual price of $19,340/tonne this year. Looking ahead, the nickel market is set to move into a small deficit position in 2011, for the first time since 2006.
• Tin. Production disruptions and shortfalls last year prevented the tin market from moving into a significant surplus situation in 2009, with a surplus of only 19,000 tonnes. As restocking demand gathers pace we should see LME stocks being drawn down and this should help to underpin prices, with Natixis Commodity Markets forecasting an average LME cash tin price of $17,500/tonne for 2010.
• Zinc. Robust growth in demand, albeit from a low base, will certainly be challenged by higher output, particularly as Peruvian output picks up on the back of the Cajamarquilla refinery and China continues to bring on new capacity. But thanks to a near 10% increase in global demand, Natixis Commodity Markets believe that the shift back to broad balance, with the prospect of rising deficits in years to come, should support an average annual price of $2,800/tonne, some 70% up on last year. By 2011, we believe that the demand-side of the market will have fully recovered from the economic downturn. As a result, the zinc market will face a deficit of over 200,000 tonnes. This should support an average annual price of $3,060/tonne next year.
Editor's Note: Natixis Commodity Markets First Quarter Metals Review - Base Metals Outlook is published by Natixis Commodity Markets Limited, Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA, United Kingdom.
Natixis Commodity Markets Limited, a trading company, provides on and off-exchange products and services. It also offers brokerage and clearing facilities; and arbitrage and physical, and stock and warrant financing and averaging services. www.natixiscm.com
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