Base metals likely to slump next year: Natixis

Base metals are likely to enter negative territory next year after a healthy 2007, according to a report published last week by Natixis Commodity Markets, a London-based research firm.

Aluminium prices likely to slump by 16.4 per cent, while copper, nickel, lead, tin and zinc also expected to decline by 14.8 per cent, 35.3 per cent 16.9 per cent, 20 per cent and 21.4 per cent respectively.

Nickel, lead and tin are witnessing a bumper growth of 75 per cent, 49.5 per cent and 56.9 per cent this year, while aluminium, copper and zinc show a marginal growth of 7.1 per cent, 0.3 per cent and 6.9 per cent respectively.

The average price of aluminium is set to rise from $2567 in 2006 and touch $2750 in 2007, but is likely to slump to $2300 in 2008. In 2005, it was recorded at $1898. Similarly, the average price of copper, nickel, lead, tin and zinc was recorded at $6731, $24287, $1288, $8763 and $3273 respectively in 2006. They are likely to rise up to $6750, $42500, $1925, $13750 and $3500 respectively in 2007 but would slump to $5750, $27500, $1600, $11000 and $2750 in 2008, the report said.

As fundamentals have remained almost stable in the recent months, aluminium prices in the remaining five months of the current year is likely to remain rangebound. The supply, however, is expected to remain balanced, i.e. 50,000 tonnes shortfall this year compared with last year's 357,000 tonnes deficit. However, given the strength in non-western world consumption, Natixis forecast the deficit increasing once more in 2008 to 250,000 tonnes.

Essentially, copper market can be summarised as demand is weak and the supply side being bullish. Since April, these factors largely cancelled each other out with monthly average prices remaining in $7,475-8,000 a tonne range. The supply tightness is partly a function of strikes, but also due to a shortfall in concentrate output (reflected by low Tc/Rc).

While the former may be temporary, the latter will take some time to work through the system, the report estimated.

Demand conditions have been weak all year in the US, while in China demand (imports of cathode) has eased reflecting over-buying earlier in the year. Consumption is weakening in Europe mainly due to seasonal changes. The demand is likely to pick up but it will be matched by higher supply.

In terms of the supply-demand balance, Natixis projects a 50,000-tonne surplus in 2007 moving to a 160,000"�tonne surplus in 2008.

Recently, the lead market appears to have been supported by the imposition of an export tax by the Chinese government. Lower supply from China is set to partially offset by weaker than expected consumption. The report forecast a 60,000 tonne deficit this year and a modest surplus in 2008.

Nickel is forecast to remain in a marginal surplus of 5,000 tonnes, on the back of a 0.9 per cent rise in western world usage counterbalanced by a 5 per cent rise in supply. For 2008, this surplus is likely to expand to 15,000 tonnes with supply growth at 4.7 per cent compared to 4 per cent for demand.

On the basis of lower than expected demand growth, tin supply is expected to witness a deficit of 2,000 tonnes on the back of disrupted supply from Indonesian mines.

In the short-term there is the potential for zinc prices to rally in response to the ongoing fall in LME inventories. However, Natixis views this move as temporary with two key features during the remainder of the year likely to help bring prices lower. These will be an increase to Chinese exports of refined zinc and a sharp rise in mine production globally. This year, prices are likely to move up. But in the wake of a supply surplus of 125,000 tonnes, prices will go down in 2008.