Supply to hit base metals in '08

Positive fundamentals are unlikely to take base metal prices up on the London Metals Exchange (LME) next year, despite the inflated movement of prices in the current year.

In 2008, though the demand for base metals is expected to grow substantially, surplus supplies are likely to take the prices down.

Developing countries led by China and India, where infrastructure development has been given top priority, are expected to increase consumption next year.

China, the world's largest producer and consumer of base metals, is finding it difficult to maintain inventories for infrastructure development for the 2008 Olympic Games, while the demand in India, which is hosting the Commonwealth Games in 2010, is also expected to grow next year.

But base metals prices are unlikely to react favourably in 2008 and could possibly decline following the expected increase in supply next year as well as from prices declining after hitting a peak in the third quarter of 2007.

According to the latest report by Natixis Commodity Markets (NCM), all base metals, including copper, aluminium, lead, nickel, tin and zinc, could move into the negative territory next year.

Zinc is likely to lead the decline in base metals in 2008, with the average price set to go down by 26 per cent to $2,300 from the estimated average of $3,100 in 2007, according to London-based NCM, a research firm. The recent downturn in the LME inventories was a temporary phenomenon, NCM said, adding that the surge in mining output would take the LME inventories up.

Zinc, which is in a marginal deficit of 17,000 tonnes this year, is likely to move to a 200,000 tonnes surplus in 2008.

Natixis has also forecast nickel prices, which gained by 44 per cent in 2007, to fall heavily by 23 per cent in 2008. The metal is likely to end the year at an average price of $35,000, and sink further to $27,000 next year.

But the shortage of raw material, the primary feature in the bull run of most base metals, is not an issue for aluminium as alumina production has outpaced demand. NCM has projected a 200,000 tonnes surplus in 2007 compared to the last year's deficit of 357,000 tonnes.

With nearly 175,000 tonnes of additional stocks expected to be added in 2008, the metal's underperformance could continue, with the average annual price of $2,750 in 2007 forecast to drop to $2,300 in 2008.

Meanwhile, the demand for copper remained weak in the US and the Chinese imports of cathode continued to ease, reflecting the overbuying of the metal earlier in the year. Given the background supply disruptions and low inventories, the annual average price of the red metal is likely to sustain at $7,200 in the current year, and may decline to $6,500 next year. The red metal, which is in a deficit of 25,000 tonnes in 2007, is expected to be in a surplus of 160,000 tonnes in 2008.

A surplus inventory of 50,000 tonnes in 2008 is likely to bring down the average price of lead to $2,500 from $2,750 in 2007.

The average nickel price at $35,000 in 2007 is also expected to decline to $27,000 in 2008 on low demand from the stainless steel industry.