Aluminium and nickel are expected to struggle under the weight of high inventories, and even when a recovery finally kicks in, perhaps later this year, prices will be slower to pick up than other industrial metals.
Faced with the bleak prospects of a sharp global economic downturn, producers and downstream users of these two metals may be keener than most to consolidate to try to ride out the storm.
Aluminium demand has been knocked by massive cuts in car production and construction activity. Nickel has been hit by consumers putting off buying expensive items using stainless steel, including fridges and washing machines.
We expect some markets, such as copper and tin to improve towards the back end of 2009. But we expect aluminium and nickel to remain depressed and to underperform, Standard Chartered analyst Dan Smith said.
Stocks of aluminium held in London Metal Exchange (LME) warehouses are within touching distance of their June 1994 historic peak of over 2.66 million tonnes, with no sign of slowing as demand plummets.
On Wednesday, LME stocks rose by almost 90,000 tonnes to 2,641,450 tonnes, having doubled in the past four months.
LME stocks of nickel are at their highest since around mid-1995.
We've seen very big cutbacks for both aluminium and nickel, it's just that the fall-off in demand has been more than the cuts, Gayle Berry, an analyst at Barclays Capital, said.
On Wednesday, mining major BHP Billiton said it would cut 6,000 jobs and close its giant Ravensthorpe nickel mine in Australia in the face of falling metals prices.
Berry said there was a lot of excess capacity for both metals, which could be restarted easily if prices were sufficiently attractive.
The London Metal Exchange (LME) three months aluminium price was last indicated at $1,355/65 a tonne, 60 percent below the all-time high of $3,380 reached last July.
Analysts predict global aluminium demand growth will be virtually flat this year, but that may even prove optimistic if offtake by top consumer China falls short of expectations and fails to offset weakness in developed economies.
By contrast, the copper market remains structurally tight, due mainly to production shortfalls which are unrelated to declining prices.
Some analysts also say zinc should be well-placed in an upturn because producers have been quick to make big cutbacks which will limit stock builds.
Aluminium could be in over supply by around 1.5 million tonnes this year, which would come on top of a similar inventory accumulation last year. Nickel is also expected to record a sizeable surplus even if more big producers join smaller companies and make a concerted round of curtailments.
Producers and consumers of these two metals and others are evidently scouring for partners to protect themselves against the worst of the downturn.
On Tuesday, Furukawa Electric Co Ltd, Japan's top aluminium products maker, and Showa Denko KK were said to be in final stage talks on merging aluminium operations.
But the scope for further such moves may be limited, some analysts say.
I can't see that happening too much given the nature of the downturn. This is different to previous recessions, said Neil Buxton, managing director of GFMS Consulting.
He did not think capital markets would have the appetite for a lot of M&A activity, adding that only a handful of companies were sitting on enough cash to finance such moves.
On top of the possible Japan aluminium merger, Russian firms, led by shareholders in top nickel producer Norilsk Nickel, have proposed creating a metals giant part-owned by the Kremlin.
But many consider this to be unique to Russia.
Either way, Berry said she saw scope for consolidation across the base metals in China, singling out the country's fragmented zinc industry as likely to see considerable activity.
But also worldwide, given the extreme pressure producer profits are under, we could see a concerted move towards consolidation, she added. (Edited by Sue Thomas)
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