Thin trading has compounded jerky price movements and made it difficult to analyse long-term trends. One of the consequences of this is that there is still no consensus about the so-called ‘supercycle’. Once again, the behaviour of China, which is hard to forecast at the best of times, is likely to be the key determinant.

Lack of clarity clouds copper’s future
Volatility caused by the great forces at play in copper mean the bull/bear split remains. Some analysts believe Chinese demand will push copper prices back up. Others are less sanguine.

Merrill Lynch recently said it expected a continued ‘supercycle’, based on rebounding Chinese demand and recurrent supply disruption. Yet the firm also thinks some years will dip from this rising curve, including 2007.

The International Monetary Fund feels current prices are unsustainable in the medium-term. It predicts copper will be trading 35 per cent lower by 2010. Others, with a more short-term horizon, suggest copper has hit a ceiling for now.

“Copper should be trading within a range between $7,000/tonne and $7,800/tonne in the fourth quarter. It is supported by supply tightness, though this is easing, and there is uncertainty over labour talks at Codelco,“ says Edward Meir, analyst for Man Financial.

Unions are negotiating separately at Codelco, and any industrial action would compound August’s disruptions at BHP Billiton’s Escondida.

Chile’s exports show vulnerability, with August concentrate exports down one-third year-on-year after the Escondida strike and an accident at Chuquicamata. However, Chile’s government expects an extra 1 million tpy by 2010 following $13 billion investment by copper mining companies.

Along with this supply increase, contracting demand could ultimately pull prices down.

“The construction industry is reeling at the moment and the upside for copper has also held off from going sharply higher because US economic statistics are deteriorating. Growth is slowing. This commodity rally has been based on demand, so as demand falls, the balance will change,” says Meir.

China’s demand growth may not counteract this, as domestic production grows. By August, China’s output was up nearly 25 per cent year-on-year and Chinese demand may not rebound as quickly as expected.

“China is using less or is using more local material from the SRB (State Reserve Bureau). Demand is down 30 per cent this year, though some expect it to rise in Q4. You can’t be bearish, but you can’t expect it to go up to $8,800/tonne again,” says Meir.

Though China remains hard to predict, it will determine the future direction of prices.

“Interpreting China’s copper demand has been an analyst’s nightmare this year. Production and trade data imply that apparent consumption has fallen by 5-10 per cent this year. However, this takes no account of inventory de-stocking or unreported production. Our estimate is that consumption growth has slowed to about 5 per cent due to de-stocking and demand destruction in response to higher prices.

“Construction and power infrastructure activity is growing strongly, but the white goods market has been weak. Substitution of copper is not occurring at a meaningful scale yet,” notes Andrew Driscoll, Regional and China Resources Analyst for Hong Kong broker CLSA.

Aluminium waits on China
Aluminium prices can expect further short-term support, with firms such as Macquarie Bank predicting inventory constraints. Over the long-term, however, some analysts predict a fall in prices.

The IMF forecasts rapid consumption growth from industrial production in emerging markets, particularly China. Yet it predicts even faster supply growth, as China’s failure to stem the tide of smelter capacity could quickly boost global supplies.

“China’s government has talked about restraining aluminium production, but it is difficult to enact decrees in far-flung provinces. The collapse of the alumina price gives smelters a big margin, so China produces and exports more aluminium,” says Man Financial’s Meir.

The speed with which China has added production capacity has helped alumina prices tumble from nearly $600/tonne to $250/tonne. Alumina production between January and August 2006 was up 51 per cent on the previous year, while aluminium production rose almost 20 per cent.

More plants are scheduled to come online by 2008 and this could encourage new smelter projects, though further government action is promised.

The World Bureau of Metals Statistics (WBMS) reports a 246,000 tonne shortfall in supply between January and July, with production rising 5 per cent to 19.2 million tonnes. Additional supply from Canada, Bahrain, India, South Africa, Brazil and Ghana, it notes, compensated for Europe’s smelter closures.

With prices currently at around $2,500/tonne, Russian producer Rusal predicts $2,300/tonne for 2007 as the global economy slows.

Zinc supported by deficit
The zinc price is supported by tight supply and CHR Metals calculates a 400,000 tonne shortfall in 2006, just as in 2005.

“There is a real prospect that LME inventories will be largely drawn down before concentrate supplies increase sufficiently to match higher demand.”

“The zinc price is supported by falling stocks and the outlook is that the market will remain tight in 2007,” observed CHR’s Huw Roberts at a recent GFMS seminar.

New projects were slow to appear, zinc having lagged behind in the metals price boom, but Roberts predicts new capacity could move the market into surplus by 2008.

Such a shift would involve a rapid increase in mine production and smelting capacity. For two years, zinc stockpiles have been in decline and China’s consumption could grow sharply.

“Zinc prices have been on a phenomenal run over the last year and LME stocks have been in freefall,” noted Peter Roberts, metals analyst at GFMS Metals Consulting.

Nickel tight for the foreseeable future
Analysts are bullish about nickel prices. Some, including Merrill Lynch, feel it has the most positive outlook in the base metals complex, with supply in deficit for as much as five years to come.

The world’s second largest producer, Inco, expects very strong demand to continue, as it has already seen producers coming under pressure from an upturn in stainless steel production.

“Our customers are looking for more nickel and we are doing all we can to supply them, but it is difficult to meet all their demands. As we have suggested would happen, the nickel market is now in a place where the industry has never been before. This is creating, as expected, considerable volatility in prices as the market adapts to the new pricing levels,” said Inco’s Executive VP Marketing, Peter Goudie recently.
Inco further believes that the strike at its Voisey’s Bay mine will not affect its third quarter nickel production, though it did stem the flow of copper concentrate. The two-month strike ended in agreement with United Steelworkers.

Prices have bounced in the last quarter, and some firms, including Macquarie Bank, believe that nickel could be prone to more selling and, therefore, price falls from its recent highs of over $29,000/tonne. But long-term the trend continues to look upwards.

Lead and tin balance out
The lead market may enter a seasonal cycle, as the winter battery market bulges, and LME stocks decline, but the overall consensus favours balance.

“The global lead market now appears balanced with metal placed on warrant in LME warehouses earlier this year likely to be drawn out before year-end. Global demand growth is strong, but weak in the West,” observed Huw Roberts of CHR Metals.

Production linked as much to zinc mine development as lead demand could bring a surplus.

“After a period of weakness, LME lead prices reflect the current tight supply situation, but we forecast a decline in 2007. If mine developments proceed as planned then both the zinc and lead markets will move into a situation of oversupply by the end of 2007. By the end of 2008 there appears to be a significant risk that metal inventories will be growing in excess of market requirements,” added Roberts.

Tin also looks balanced, WBMS reporting a small surplus from growing refined tin production in China and Malaysia.