Fundamentals turn favourable for base metals

The fundamentals are gradually turning favourable for base metals, especially with major demand emerging in Asian countries led by China, followed by India. 

With the economies of the two leading drivers of base metal consumption showing healthy growth, base metal demand is likely to increase with the infrastructure-centric approaches of the two governments. 

According to London-based Natixis Commodity Markets, 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 having a temporary impact. The year 2009 was characterised by massive advances in prices, which occurred well in advance of an improvement in the visible fundamentals. Many factors that attracted investors to the base metal sector have rebounded of late. Base metals as an asset class continue to gain acceptance. We, therefore, expect that investment funds will maintain their long-side bias, said an analyst. 

POSITIVE RETURNS Base metals price outlook ($/tonne)
	2009	2010	% Change
Aluminium	1,668	2,370	42.10
Copper	5,164	7,885	52.70
Nickel	14,700	19,340	31.60
Lead	1,726	2,565	48.60
Tin	13,593	17,500	28.70
Zinc	1,659	2,800	68.80
Source : Natixis Commodity Markets

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. After a 1.56-million tonne surplus in 2009, aluminium is likely to witness a smaller oversupply this year, of 532,000 tonnes. That the market will remain in surplus is largely due to a 9.5 per cent rise in production to around 40.6 mt, as new capacity comes on stream in China and West Asia. 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 per cent increase in global usage this year, to 40 mt. 

For copper, the market’s fundamentals will improve during 2010, with a rebound in mature economy demand being a key driver. Further, 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, Natixis forecast that the global balance would move into deficit this year, albeit a relatively small one at 142,000 tonnes. 

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. 

The market for nickel will finally return to deficit in 2011. A sharp demand-side recovery is expected to limit the 2010 surplus to 16,000 tonnes. Nickel demand is expected to rebound by as much as 10.3 per cent this year, with much of it expected to take place in the second part of the year. Thanks to a near 10 per cent increase in global zinc demand, the shift is back to broad balance, with the prospect of rising deficits in years to come. The zinc market will face a deficit of over 200,000 tonnes.