In the bull market acrossindustrial commodities (and more recently the soft commodities), the role ofthe individual fundamentals can sometimes get lost. However, they havebeen critically important in determining the relative performance of theindividual metals. The most extreme examples are nickel and zinc, whichare both (in early May) around 50% down on their bull market peaks, while sofar this year both copper and tin have made new cycle highs.
The recent experience of pricingin the zinc market highlights how there can be a massive correction in theprice on the back of only a minor deterioration in the fundamentals. Whenzinc prices peaked at $4,620/tonne in November 2006, LME inventories werearound 100,000 tonnes. In early May, the zinc cash quote was hoveringaround $2,200/tonne, while LME stocks were just 130,000 tonnes. Themarket has chosen to focus on the strong rebound in mine output, which should filterthrough to sharply higher refined output as 2008 develops.
Zinc's sister metal - lead - hasdisplayed similar trends with the cash quote in May around 40% below the bullmarket peak of $3,975/tonne registered in October 2007. However, lead'sfundamentals are little changed. The concentrate market remains tight,while crucially exports from China (the only country with significant spare smeltingcapacity) remain low.
The sharp decline in nickelprices reflects a decline in demand and an inventory increase from under 5,000tonnes in late 2006 to above 50,000 tonnes in early May; however even in thismarket, the initial sharp decline in prices took place against a background ofonly a small inventory increase.
Although we recognise thetightness in the tin and copper prices, which have supported high prices, theexperience of the other metals highlights that it only takes a minor change insentiment/fundamentals to generate a very different price environment. For both copper and tin, prices in early May are well above our predicted annualaverage for the year of $8,200/tonne and $20,000/tonne respectively. Assuch, we expect a correction in these markets in the second half of the year.
Natixis Commodity Markets hastaken a cautious approach to prices over the remainder of 2008. This in partreflects the poor economic climate. In our view, most of the more-lookingindicators - the surveys of business and consumer confidence and the OECDleading economic indicator - point to a sustained period of slow growth in themature economies. In addition, the sub-prime crisis is focused onindustries which are key consumers of base metals, notably construction andautomotive.
The anecdotal evidence thatNatixis Commodity Markets receives reinforces our view of relatively weakdemand conditions. Generally, physical premiums are under pressure. Where they are holding up, for example in the copper market, this tends to be afunction of tight supply rather than strong demand.
The main support for aluminium priceshas come from rising production costs (witness the flat nature of far forwardprices on the LME) rather than the supply-demand balance fundamentals. This may support prices around current levels ($3,000/tonne). However, wedo not expect further significant gains, given the deteriorating demandenvironment and with LME inventories remaining over 1m tonnes. Despiteforecasting a surplus this year of 215,000 tonnes, a weak dollar and highenergy prices may continue to support the aluminium price moving forward. As such, Natixis Commodity Markets forecasts an average annual price of$2,900/tonne.
In the short-term, NatixisCommodity Markets believes there is the potential for the copper market to seenew price highs as the myriad problems afflicting the supply-side of the marketremain a feature. For the moment at least, this is overshadowing theimpact of weak demand in the OECD economies. Although supply disruptionswill no doubt remain a feature of the copper market, most of the multi-year labourcontracts have been renewed, which removes them from the equation. Weexpect that prices will remain above $7,000/tonne for much of the second halfof this year. As such, and in light of recent highs, we forecast an average LMEcash quote of around $8,200/tonne in 2008 and we project a market surplus of25,000 tonnes.
The extreme tightness in the leadmarket may begin to ease. We expect the availability of lead concentrateto improve as the year progresses. This is based on higher growth in Australianoutput, as a series of strikes and technical problems that curbed output arenow resolved. We are assuming the Magellan mine will restart some time inQ3. Equally important, the market will have to absorb the first full yearof production from the 85,000 tpy San Cristobal operation. There is plenty of spare refiningcapacity (mainly in China), so we expect higher output and exports from thissource as the year develops. Overall, Natixis Commodity Markets isprojecting the market to be in a surplus of 50,000 tonnes. We forecast anaverage annual price of $2,800/tonne for 2008.
Given the sharp cutbacks instainless production and the decline in the austenitic ratio in Q3 last year,nickel demand slumped in 2007 and has still not been able to recover. However, Natixis Commodity Markets believes with an improvement in stainlessproduction in Q1 and Q2, nickel demand should show a rebound some timesoon. Last year, the market was in oversupply - largely the result of thesurge in Chinese nickel pig iron production. Our supply-demand balancesuggests the market will be in a surplus of 10,000 tonnes this year. Interms of our price forecast, given the current economic climate, the upwardtrend in LME inventories, we envisage nickel prices to average $26,000/tonne in2008, in comparison to our previous forecast of $30,000/tonne.
The further tightening of themarket and the record prices seen up until late April have encouraged us toraise our average annual price forecast. In the short-term, we believethe tin cash quote will continue setting new highs on the back of its positivefundamentals. However, Natixis Commodity Markets believes that after theexceptional gains seen so far this year prices are likely to suffer a correctionin the coming months. A modest improvement in Chinese production, inparticular, should see the annual tin price in 2008 averaging$20,000/tonne.
Our supply-demand balanceanalysis points to an acceleration in the rate of inventory accumulation as theyear develops and, as such, we project a surplus of 145,000 tonnes for2008. Our outlook remains relatively unchanged from our previous reportin terms of prices. We are now forecasting an average price of$2,350/tonne for 2008, which is roughly in line with the average price in Q1 ofthis year.
Base metal price outlook 2005 to 2008
Cash price $/tonne