From metals price forecasts for 2008 you can almost choose what you want to believe. Some analysts see the market remaining flat, some see metals gaining further on sustained demand growth and a weaker dollar and some are distinctly bearish.
At the beginning of the year for instance, Barclays Capital said price rallies in copper, zinc and nickel belied weaker prices in December, and that base metals will find current strong prices hard to maintain.
A recent report from Ernst & Young, however, suggests that no analyst is to be believed. The report highlights how wrong analysts have been and says: “Current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices, rather than the conventional wisdom that the industry is near the top of the cycle.”
Ernst & Young show that estimates have been anywhere from 20 per cent to 200 per cent below actual prices since 2005. The firm implies too that analysts’ overly bearish sentiments have slowed mining companies’ investment in new capacity and, therefore, contributed to tight markets.
Hindsight, however, is clearer than foresight.
“Even august bodies like the IMF, the World Bank, the OECD would never have predicted the current cycle. Everyone got it wrong,” says UBS analyst Robin Bhar. “With a near impossible task of predicting future prices, it is no wonder that metals analysts are keen not to stray too far from the comfort zone of historic average prices.”
Producers have also been investing in M&A to grow their portfolios, rather than challenging and costly new mines. Last year saw significant activity and the trend has continued unabated this year.
“Commodities are seen as a good investment. In the past, metals producers were poorly rated, but now they have gone up considerably, which is why we are seeing bids for companies like Rio Tinto and Xstrata,” notes Herwig Schmidt, head of sales at Triland Metals.
A copper conundrum
There is certainly some bullish sentiment for copper. Since December, prices have climbed from just below $7,000/t to almost $8,000/t.
Société Générale sees investment in commodities growing this year and producers such as Freeport McMoran Copper and BHP Billiton believe that growth can persist even if the US economy weakens, as the slack will be taken up by China and India.
The market has been supported this quarter, not only by China’s growing imports of copper and semi-finished products, but by its harsh winter, which put a stop to production in some areas. This kept the market going even through the normally quiet Chinese New Year holiday period but commentators point out this is a temporary situation.
“Disruption from the weather will be short-lived in comparison to the electricity shortages we saw in 2004/5, when there was simply a lack of generation capacity. Now, there are transport delays on rivers transporting coal but as soon as it warms up they will be back online,” says John Kemp of Sempra Metals. “The loss of production will be of short duration, and of course the weather is affecting consumption, shutting down many fabrication plants.”
Longer-term however, the lack of big deposits to rival those found in Chile of the 1970s and 1980s, remains a concern.
“There couldn’t be a better environment for copper miners. There may be small surpluses in the next few years, but prices are likely to still be very strong. Demand has simply outgrown supply by miles,” says Michael Widmer of Lehman Brothers.
China will define whether demand persists but the country remains as hard to predict as ever.
“There has been a changing pattern in copper in China. There are relatively few long-term contracts between producers and Chinese companies this year, so there are more swings in backwardation. The problem is also that we can’t be sure China knows what it is doing and it is very difficult to forecast any pattern,” says Triland’s Schmidt.
Costs drive aluminium
For most of December and January, aluminium seemed stuck between $2,400/t and $2,500/t, then it broke sharply upwards to over $2,800/t and has since topped $3,000/t. Some feel this could herald a new prevailing pattern, with aluminium escaping the $2,400/t to $2,800/t constraints it has seen for much of the last 18 months.
Analysts are predicting a possible price ceiling establishing around $3,000/t. MF Global analyst Ed Meir is among those who observe that aluminium is “in the midst of defining a trading range” and discerns an upside of last April’s high of $2,930/t and a floor at $26,50/t. Some producers, however, have expressed the belief that prices could soar further if supply disruptions persist.
Cost pressures are driving this market. Hikes in input costs are especially acute in China, which lacks good quality bauxite and alumina and faces power constraints – not only from the recent harsh weather. Power problems in South Africa also spiked prices in February.
Data also suggests that while producer inventories have risen in the early part of the year, they are still far below normal.
Lehman Brothers, which had forecast a surplus for 2008, now sees a more balanced market, given rising cost pressures and supply disruptions in the Guizhou, Shanxi, Hunan, Sichuan and Yunnan provinces, affecting 1.6mt of smelting capacity. Its surplus forecast is down from 150kt to 38kt.
Indeed in January, annualised aluminium production fell sharply as China’s output dropped and the market expects Chinese production to emerge as having underperformed throughout the first quarter. This would put pressure on domestic spot prices, which some see breaking through $3,000/t (RMB 22,000) during the next quarter. Currently, most Chinese smelters are believed to be back in production, with full capacity regained by April.
Zinc output on the up
Zinc has been volatile in recent months, trading in the $2,200/t to $2,550/t range. It has seen a relatively strong supply response compared to other base metals and UBS predicts a 13 per cent increase in mine supply this year.
“We do not expect zinc to be in leadership mode anytime soon,” concludes MF Global’s Meir.
Zinc has seen fewer years of deficit and demand growth lagged behind copper, so supplies were never as tight.
“Zinc is the one metal where there has been a rapid supply response. The industry is less fragmented and easier to enter than copper, for example. Also, there were known projects waiting for the right price. In copper, nickel and lead there is no such inventory of world-class projects,” says Bhar.
Citigroup analysts agree, noting zinc’s sharp fall since May. But in lowering their 2008 forecasts, they acknowledge it may be oversold, with prices able to firm up later in the year.
Nickel: still to settle?
Volatile nickel has reached up to $30,000/t, but has generally traded between $26,000/t and $28,000/t. Prices have eased from record highs in May as stainless steel distributors have destocked nickel inventories and Chinese mills have turned to lower grades of nickel pig iron.
Consolidation among producers continues, putting pressure on high cost producers. There are now committed mine projects in place, accompanying relatively large surpluses, which have calmed the market.
Some analysts are warning, however, that nickel could still face deficits and higher prices over the next three years if there are unexpected delays to production from new mines. Some even feel that $40,000/t is still attainable.
Lead looks for new projects
