Metal forecasting

SMARTSHARE

In many ways, forecasting is a mug's game. The payoffs are huge precisely because it is difficult to make accurate forecasts. In entertainment, it is impossible. Who knows if the greatest box office success of April 2006 will be an action flick or a family drama?

In commodity-driven sectors, demand and supply are more predictable. Take industrial metals, for instance.

Whether it's iron, aluminium, copper or zinc, global production capacities are known and the value-chain is tracked from ore extraction to downstream offtake. Even capacity expansions are known years in advance.

Downstream consumers are also easier to track. Aviation orders (aluminium) are booked years in advance; construction projects (steel, copper, zinc) take months; telecom and power grids rollouts (copper) are long-gestation.

Using forecasting tools and econometric models, it is possible to deliver predictions for several quarters in advance. But there are too many "x-s" in the equations to make even these markets completely predictable.

China is the biggest unknown. The People's Republic is both the biggest source of global demand and also the largest builder of manufacturing capacity. Over the next decade, India could become a large player, though it's unlikely to rival China in scale.

There has been a burst of interest in non-ferrous metals over the past month. Aluminium is at the centre of this trend although zinc and copper have also been beneficiaries. The usual suspects are cited "" higher Chinese and Indian demand as well as higher demand from the aviation industry driven by Indian orders.

Over the next decade, the global demand for aluminium is likely to double "" a CARG of 8 per cent is on the cards. Demand will exceed production until 2008, with a consequent mopping up of inventories and firm prices.

According to the Canadian RBC group, aluminium prices will rise 22 per cent in 2006. Citigroup's estimates are in the range of a 15 per cent rise this year with a likely LME price average of $2,000 per tonne ($1,900 last year). A Chinese analysis from Beijing Antaike Information says 2006 LME prices will average $2,150 per tonne.

One reason for an upwards revision is the push to sentiment given by massive orders for new aircraft. A little confusion arises from the contradictory signals coming from the power market. Despite strong demand growth in metals, some manufacturers could shut down due to high power costs.

Aluminium (and copper) extraction is an extremely power-intensive, electrolytic process. If power costs (driven by crude and coal prices) outrun base metal prices, facilities will shut down.

Indian aluminium offtake has risen 13.5 per cent (in volume terms) between April 2005-February 2006. Local copper prices are at record levels "" this is driven by a massive thrust on building power transmission grids as well as upgrading telecom networks.

Hindalco is a major player in both metals. It has significant captive power capacity of its own and is perhaps the cheapest aluminium producer in the world. It is doubling its copper smelting capacity. In terms of Indian marketshare it holds around 42 per cent in the primary aluminium market with 63 per cent in rolled products.

Birla Copper, the copper division has about 40 per cent marketshare in the Indian copper market. The stock's gone through the roof "" but if those projections hold, there could still be some value on the table.