Analysts are largely predicting continued tightness for some time yet: “There are constantly downward revisions to output growth in copper, partly because there have been delays to new projects,” says Barclays Capital’s Ingrid Sternby. “Mine production will grow some 800,000 tonnes less than anticipated due to technical problems and other supply constraints, and these factors are likely to last longer than the market had widely believed.”

There have been many disruptions to supply this year, from equipment failures such as that at the Collahuasi mine in Chile in early 2005, to the effects of earthquakes in Chile’s Cerro Colorado mine, along with the effects of industrial action at numerous many facilities.

Furthermore, industrial production growth is accelerating again, suggesting upward pressure on global demand in areas other than China, and further supply disruptions or delays to new mining projects coming online could exacerbate supply constraint for a longer period than some had expected. Many analysts are set to remain extremely bullish about copper prices in the longer term.

Peter Hollands, Managing Director of Bloomsbury Minerals Economics (BME) estimates a surplus of 250,000 tonnes materialising in 2008. The BME forecasts a future long-term average copper price of $1.20 per pound   mainly because of exchange rate effects   and believes that financial institutions’ reluctance to consider properly the impact of exchange rates will starve the copper mining industry of loan capital, prolonging an acute shortage of copper.

BarCap’s Ingrid Sternby continues: “There are no shock absorbers in terms of inventory or spare capacity, and any supply disruptions are feeding straight through to prices. The price risk is very much on the upside still. Then you have stronger US economic data too, which suggest demand is not about to fall apart.”

“The phrase ‘superspike’ comes to mind,” notes Peter Kettle, research director at the Commodities Research Unit (CRU). “We can’t do anything to increase supply in the short term, so the price is bid up to the point where consumers can’t consume, and we’re already seeing that in plumbing tube. We’re looking at strong production growth in the next two years, but it is needed now.”

Aluminium responds to China’s tax changes
China’s attempts to cool domestic aluminium smelter output and curb power demands from the sector seem to be gaining traction.

In fact, the China Nonferrous Metals Industry Association’s announcement of a 6 per cent cut in aluminium production, equal to around 380,000 tonnes, and possible further cuts, in an attempt to bring down alumina prices, sent aluminium prices to their highest levels since 1989.

This builds on China’s efforts to curb aluminium export through its domestic tax regime.

“A combination of factors - the removal of the export tax rebate and the introduction of a tax on exports - has impacted Chinese primary aluminium exports, reducing the flow of material out of China,” says Ingrid Sternby or Barclays Capital “There are also negative implications on supply from high alumina and energy prices. It is not very profitable to make aluminium in China and most smelters are operating at a loss, so they need aluminium prices to rise.”

China’s Ministry of Finance has suggested recently that export taxes on aluminium are unlikely to rise next year, and will probably remain at 5 per cent, but the cooling effect on exports is expected to continue nonetheless.

Alumina prices generally remain historically high, which along with rising energy costs is putting a squeeze on aluminium producers’ margins. The effect was seen in November, when aluminium prices reached ten-year highs in the wake of Alcoa’s announcement that it would cut back production at its Eastalco smelter in the US in December because it could not agree a competitive power supply for the facility.

The market remains tight, and with energy prices starting to bite more noticeably, there is a feeling that aluminium prices could continue to rise.

One source points to the difficulty of getting the consumption equation right due to a lack of clarity over unreported stocks, but believes that stocks look relatively tight, though not to the same degree as zinc.

The level of tightness may depend on how much China’s domestic aluminium demand grows next year. Recent views expressed by the Vice-Chairman and Secretary General of the China Non-ferrous Metals Industry Association, Pan Jiazhu, suggest that demand may grow to 7.66 million tons in 2006, up from the expected 6.78 million tons in 2005.

Zinc still ready to rise
The idea of a ‘vertical ceiling’ is not out of the reckoning for zinc, with a severe shortage of stocks leading to the widely held opinion that the market is ripe for a price spike.

Tight supply conditions are seen to dominate for some time to come, and predictions that zinc might start to emulate copper, having lagged a year or so behind the bull run, are still firmly held. CRU’s Peter Kettle is among those who feel prices could still take off in the absence of new supply.

He is among those who feel that producers are cautious about developing new projects, and that a turnaround to surplus may be getting further away. “Of all the metals, zinc faces the biggest supply shortfall next year, though reported stocks are still relatively large compared to others and are less far below long-term averages than copper or nickel. . . zinc is by far the most likely to perform on the upside,” Kettle says.

Nickel has mixed supply messages
Positive supply side news for nickel came with the early shipping of the first concentrate from Inco’s Voisey’s Bay mine in November, some six months ahead of the planned project schedule. The company has said that it expects to produce the first finished nickel from the site in Q1 2006.

Voisey’s Bay is one of the major developments in nickel supply, so its impact is significant. However, prices still reflect a market susceptible to disruption and low stocks.

“In 2006, production from Voisey’s Bay is expected to help increase Inco’s nickel production on a standalone basis to an estimated 540 million pounds, compared to an estimated 485 to 490 million pounds in 2005,” an Inco spokesperson told The Ringsider. “Over the longer term, combined with production from our Goro project in New Caledonia, plus an expansion at PT Inco in Indonesia, we expect to bring Inco’s standalone nickel production to 700 million pounds by 2009 – an increase of about 35 per cent above our record production in 2004.”

The spokesperson went on: “We believe that growth in global demand for nickel, led by China, will outpace the growth in supply from new nickel projects that have been approved and that will come on-stream in the coming years. We believe that the world will require the equivalent of a new Goro project every year just to match the long-term historical growth rate of nickel of 4 per cent per year.”

Having been through a three-year period of historically high prices, nickel came off sharply for a few months, but has since bounced back. Inventories remain low, but Q3 this year saw demand continuing to fall from the stainless steel sector, where substitution of lower grades remains a factor.

Though its tight supply echoes the situation in copper for now, nickel perhaps faces less tight supply conditions going forward, and predictions of a surplus are firmer than they have proven to be in the copper market.

“The market will probably be in surplus in 2006,” believes CRU’s Kettle.

Nevertheless, much could depend on the Inco and Falconbridge’s project pipeline and decisions over whether projects on the combined book may be delayed, if Inco is successful in its friendly takeover. Some concerns over the implications of this deal have firmed up prices in recent months.

Lead in balance, tin on the slide
Fuelled by the anticipated cold winter in Northern Europe, demand for automotive batteries could well rise in the next few months, and with output of primary lead having declined sharply already, leading to high prices, this could bring further upward pressure.

However, with the high level of recycling in the market, the concern is over the amount of primary lead that can top-up the flow of material, and with new supply expected to come online in the near term, tightness is expected to ease.

The market has also had an eye on lead as a potential candidate for tax regime changes in China, similar to those seen in aluminium, in order to limit exports.

“This could happen so that [China] is not a net supplier of lead to the rest of the world, but there are no signs that this is happening yet,” notes BarCap’s Sternby.

Though no concrete moves have been made on that front, it is the only remaining metals market where export control might be desirable for China, given that it is a net importer of other industrial metals, including tin as of the last few months.

The ‘tin rush’ that has seen thousands of small-scale mines spring up in Indonesia, which account for a huge amount of world production, has put the market into relative balance despite anticipated growth in demand for 2006. It seems it is the only metal on which there is - as one analyst puts it - ‘a negative vibe’.

Jim Banks
LME Ringsider Newsletter
Edition 3, Winter 2005