BASE METALS
talperspective,demandremainsweakandisbeingoutpaced
Figure 1: Base Metals Index (Jan 05 – Aug 08)
by higher output. LME inventories also remain in excess of
1.1mtonnes.Withthebullmarketpeaknowbehindus,GFMS
-MC believes investor interest in the energy-intensive com-
modity will decline.
Our analysis of the fundamentals suggests that the market
will be well supplied this year with a surplus of 393,000
tonnes. This is based mainly on a steady rise in production
against a background of weak demand. However, with the
demandenvironmentlikelytostruggletopickupandrealisti-
cally not rebound till mid-2009 and further capacity in the
pipeline, we believe the aluminium market will move into a
larger oversupply position at 446,000 tonnes next year. As
such, GFMS-MC is forecasting an average annual price of
US$2,955/tonne in 2008, and US$2,700/tonne in 2009.
Source: GFMS Metals Consulting
Copper Remains Tightest Market on Fundamentals
Againstabackgroundoffallingoregradesandhighutilisa- 2008 and 2009 at 10,000 tonnes and 5,000 tonnes, respec-
tionrates,supplydisruptionshasbeenthekeydeterminantin tively. Thus, are forecasting an average annual price of
settingthedirectionforthecoppermarketinthefirsthalfof US$23,775/tonne in 2008, while in 2009 expect the cash
2008. However, we believe that weak demand will be the price to decline to US$21,000/tonne.
main theme for the remainder of the year, reflecting lower
offtake from the construction and automotive markets. We Higher Refined Lead Output Will Put a Cap on Prices
therefore project 2007’s market surplus to be reduced to According to our supply-demand balance, tight supply at
99,000 tonnes in 2008 and forecast an annual average price the concentrate stage has been at the forefront of the lead
of US$8,000/tonne in 2008. However, we do not expect this market since 2003. This, rather than strong demand, has
trendtoreplicatenextyear.GFMS-MCisforecastingthemar- kept the market in a deficit position. However, since the
ket in 2009 to return to surplus of around 225,000 tonnes. start of 2008, concentrate tightness has eased.
This should drag the average copper cash price down next Lead demand may improve in early Q4 associated with
year to US$7,000/tonne. buying for the battery season. However, we expect only a
slow improvement in the demand for original equipment
Stainless Steel: The Main Drawback for Nickel batteries. GFMS-MC envisages a slow improvement in
Typically,nickelbenefitsfromthestronggrowthofstainless demand to be outperformed by higher mine output with
steelconsumption/production.However,periodicallythenick- much of the growth expected in Australia, Bolivia and
el market is hit by destocking in the stainless steel market China. This will increasingly filter through to higher refined
reflecting earlier over-production. This year the inventory output. Although there has been no firm news on the
adjustment has been exacerbated by a cyclical slowdown in Magellan mine, for the purposes of our supply-demand bal-
demand. The nickel market has also been affected by higher ance, we expect a restart sometime in late Q4. Also, with
supply. the San Cristobal mine currently ramping-up, the market
Lastyearsawthemarketinoversupply,asproductionofthe willabsorb75,000tpyofextracapacity.Furthermore,China
low-grade nickel pig iron surged. This took place at a time is adding significant new refining capacity this year. Given
whenthestainlesssteelmarket(outsideofChina)wasweak- the improvement in the availability of concentrate this will
ening. However, we note growth of Chinese pig iron produc-
tion is slowing down as raw material costs continue to rise.
Figure 2: Base Metals Balances (2008 – 2009)
This factor has already forced some nickel pig-iron producers
in China to run their operations below break-even level.
Nevertheless, we believe any lower output from this source
will be offset by higher production outside of the country,
driven by the Ravensthorpe and eventually Goro projects.
Ontheotherhand,nickeldemandremainsweakasstainless
markets in Europe continue to deteriorate. Consumers are
only ordering enough material to cover their immediate
needs, causing stocks at mills to rise. The key feature about
demand weakness for nickel this year is the cutbacks in
Chinese stainless output reflecting the surge in output in
2007 and in the early part of this year. GFMS-MC remains
cautious about the prospects for the stainless steel sector,
thereforeisnotexpectinganimmediatereboundinthenick-
el market anytime soon. We expect a modest surplus in both
Source: GFMS Metals Consulting
COMMODITIES NOW SEPTEMBER 2008 67
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