Credit Suisse Metals: Base Metals

Base metals have performed strongly over recent months, with all metals resuming their upward trend in the second half of December, after the short-lived period of “risk-off” earlier in the month. Given our macro view that the level of demand for basic materials is above trend, with demand expected to continue to grow strongly over the coming year, we expect the price of most metals to move higher. However, the magnitude of increases is likely to vary considerably, with the relative supply response the key differentiating factor.

Aluminum
Despite low levels of capacity utilization, particularly in China, aluminum prices increased over the second half of 2010. While we expect prices to continue to move modestly higher over 2011, as demand growth remains very strong, the increase is likely to be more subdued than for some other metals, as the high level of inventory and continued overcapacity weigh on prices.

As with many commodities, developments in China will likely be a key influence on global supply and demand. When China is included, global inventories look very high, with significant excess global capacity. However, given that China has effectively removed itself from the global market for the next year or two, with the NDRC making it clear that China will no longer be a major aluminum exporter (which they consider akin to exporting energy), global balances are in practice tighter than they first appear. Given this situation, it is possible that LME aluminum will trade at a premium to that on the Shanghai exchange over the coming year. This, coupled with continued cost escalation – driven in part by higher oil, thermal coal and alumina costs – and a small production deficit in 2011, is likely to support a modest further increase in LME prices.

Our expectation is that LME prices will increase to around US$2,600 by Q3 2011, before softening a little into 2012. It should be noted that we expect aluminum prices to remain well below the high of US$3,380 in late 2008. Our forecasts are a little more bullish than the Bloomberg consensus of analysts and current futures market pricing.

Copper
We continue to expect copper to perform the best among the base metals over 2011. Demand is likely to remain strong, despite higher prices, with the “low lying fruit” in terms of substitution mostly taken during the period between 2006 and 2008 when prices were also mainly in the US$8,000s. While the rate of substitution is likely to increase as prices move higher, the impact is unlikely to be significant until prices move well beyond US$10,000. In addition, there are several copper ETFs being proposed for 2011, which could add to the upward price pressure, although the precise modality of any influence on the physical market is unclear.

In addition to strong demand, copper supply looks to be highly constrained. Our ex-ante supply and demand forecasts suggest that the copper market will be in a deficit approaching 700,000 tonnes in 2011. This deficit is likely to occur against a backdrop of already very low inventories. As noted in our report, Copper Inventories: Approaching 2008 Lows, total copper inventories are approaching the low as a share of global consumption seen in 2008, with inventories at the consumer and producer level particularly thin.

We expect copper prices to move a further 20% higher over the first half of 2011, before beginning to stabilize in the low- to mid-US$10,000s over the second half of the year as higher prices begin to drive higher rates of substitution and supply grow begins to rebound. Our forecasts are significantly more bullish than anticipated by the futures market and the mean of the Bloomberg consensus. Despite our above-consensus forecast, we see the risks as to the upside, with any supply disruptions (natural disasters, strikes, etc.) likely to see prices spike higher.

Lead
After increasing modestly this year, we expect lead prices to continue to drift up over 2011. While the market was in small surplus during 2010, demand is likely to grow significantly next year, underpinned by strong growth in global car production. In particular, the strength in Chinese car production has seen the level of Chinese-led exports moderate over the course of the year.

Most of the incremental supply for lead is likely to occur in China over coming years. However, while the market looks relatively balanced for 2011, over time it looks likely that increasing environmental concerns will see supply growth in China moderate, much as has occurred in the developed economies over the past few decades. We expect prices to increase to around US$2,600 per tonne by the middle of next year, but to then moderate a little through the end of the year. These forecasts are a little more bullish than the mean of the Bloomberg consensus of analysts or current futures pricing.

 Nickel
After performing strongly over the second half of 2010, we expect nickel prices to increase modestly further over the first half of 2010, with prices underpinned by continued strong demand growth, particularly from China. However, as we move into the second half of 2011, we expect supply to respond strongly, with prices beginning to taper off as we move toward 2012.

Stainless steel production growth should remain the main driver of demand. However, while we expect global stainless steel production to continue to recover over 2011, the correlation between nickel demand and stainless steel may begin to weaken as production begins to substitute toward chromium-based stainless steel, which contains little or no nickel. While we expect supply to be growing strongly by the end of 2011, the timing of any pickup is highly uncertain.

We expect nickel prices to increase to around US$25,000 by Q2 2011, before moderating to finish the year around US$24,500. Despite this relatively cautious outlook (given the positive macro-economic backdrop), we remain more bullish than the mean of the Bloomberg market consensus and futures pricing over the first half of 2011. However, it is notable that we expect prices to remain well below the peak of US$51,800 seen in 2007 throughout the forecast period.

Tin
After performing very strongly over 2010, we expect tin prices to move only modestly higher over 2011. While we expect the tin market to remain tight, with demand growth remaining strong, tin supply should begin to recover as Indonesia in particular deals with some of the issues that saw their supply fall 20% this year. Furthermore, China’s tin output is expected to rise strongly in response to current high prices. We expect tin prices to increase to around US$28,000 per tonne by the middle of 2011 and to remain at that level over the second half of the year. We remain more bullish than both the Bloomberg consensus of analysts and current futures pricing.

Zinc
After performing well over the second half of 2010, we expect zinc prices to continue to drift up over the first half of 2012 as global demand continues to recover and markets look ahead to a tighter market in 2012. While zinc looks well supplied at present, demand for zinc is likely to rebound somewhat over the first six months of 2011 along with global steel production. On the supply side, China plans to close around 400 kt of smelter capacity over the next three years, which, along with other expected production rationalization, is expected to see the market tighten significantly into 2012.

We expect zinc prices to increase modestly to around US$2,500 by mid-2011, but for prices then to soften a little over the remainder of the year. We remain more bullish than both the Bloomberg consensus of analysts and current futures prices over 2011. Prices are not expected to approach the all-time high of US$4,500 at any point in the next year or two.