China's Demand for Base Metals to Remain Robust
By Jon A. Nones
19 Dec 2006 at 07:24 PM EST
Go here to see the article with charts -- resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- As analysts continue to debate what effect a potential U.S. economic slowdown would have on China’s demand for commodities, especially base metals, Moody’s Investors Service indeed predicted a fall in base metal prices next year, but not at all due to a reduction in demand from China.
In a report entitled, “Base Metals Industry Outlook 2007,” Moody’s said base metals prices will moderate in 2007, but any weakening in U.S. demand will be offset by continued strong demand from China.
“China will again be a key factor in the performance of the base metals industry, with the Chinese manufacturing, construction and power sectors continuing to advance and underpin the demand for copper, nickel and zinc, in particular,” the agency said.
Supply will continue to be constrained by the lack of meaningful new capacity, especially in copper, nickel and zinc, and prices will continue to derive support from ongoing challenges in rising production costs and labour disputes at mines.
According to Moody’s, prices will still “remain at favourable levels, allowing most producers to continue to generate excess cash flow.”
However, Moody’s said the biggest threat to price is falling investment demand, which has “contributed significantly to the increasing volatility witnessed this year, particularly in copper.”
“A significant withdrawal of funds from any or all of the metals could result in a significant drop in price from current levels,” warned Moody’s.
Base metal prices are trading double or higher than levels hit 18 months ago with copper now at $6,600 per tonne, aluminium at $2,785/t, nickel at $35,100/t and zinc at $4,451/t.
William Adams, metals analyst for BaseMetals.com, said last week that prices are likely to drift until fundamentals shore up.
“Although the market has got used to these high prices levels, it is important to remember that these are exceptionally strong prices for the metals, and therefore, they need ongoing strong fundamental developments to support these prices,” he said.
In today’s report, Moody’s breaks down the fundamentals for copper, aluminium, nickel and zinc as we move into 2007.
Copper
Since the price spike in May, slowing U.S. demand, increased mine production and recently moderated import volume from China have all added to inventory stocks.
Metal stocks in LME warehouses are at about 173,000 tonnes, up nearly sevenfold from a low of 25,525 in July 2005, although still “considerably lower than historic averages,” according to Moody’s.
According to statistics released by the General Administration of Customs today, China’s copper imports were down 35% from last year at 585,190 tonnes in the first 11 months. At the same time, copper exports surged 132.5% to 243,291 tonnes.
“The moderation in import volume from China is most likely a matter of timing and internal inventory drawdown,” said Moody’s, adding that it “does not anticipate a significant near-term reduction in Chinese demand.”
In fact, Adams implied today that the metal could be headed back to China after its multi-month destock.
“Perhaps with prices now $1,000/t to $2,000/t below the levels seen between May and October, the price is attractive enough to restock,” he said.
In addition, Adams said that some Chinese smelters have “bitten the bullet” and are starting to accept treatment terms at about $60/t despite previously saying they would not accept anything less than $100/t.
“This suggests a growing need for feed in China having run down stocks in recent months,” he added.
Although global copper production increased in 2006, mine production was lower than expected due to supply disruptions with strikes at La Caridad, Cananea and Escondida, and geotechinal issues at Grasburg and Chuqicamata.
Copper prices hit highs of 6,715/t last night with reports that workers at the Xstrata’s Altonorte copper smelter in Chile went on strike after rejecting a revised contract offer.
Moody’s said price volatility would continue as events like these unfold, but the fundamentals of the long-term copper market would remain stable. However, the agency warned that investors should anticipate prices drifting lower in the coming months towards a more sustainable level.
“With growing signs of a weakening U.S. housing market, moderating demand growth from China, increased substitution effect due to high prices and new mine production coming on line, we anticipate copper prices to settle below today’s levels, but remain well above historic averages,” Moody’s said.
But in the near term, Adam’s said, “there are a number of pointers that suggest copper may not yet be ready to head south and indeed we feel copper may still have an upside leg in it.”
Aluminum
China continues to be a major factor in the aluminium market, with primary production up roughly 18%, to 7.7 million metric tonnes for the first 10 months of 2006. But while consumption has also grown strongly, the country continues to be a net exporter, although in a lesser amount than seen in 2005.
However, the lack of adequate power in China, the existence of older inefficient smelters and recent government initiatives to increase export taxes from 5% to 15% on primary aluminium are expected to slow the level of exports, according to Moody’s.
Continued demand from the automotive industry, and further strengthening in aerospace, commercial construction and industrial use were key drivers in 2006.
In 2007, Moody’s expects aluminium prices are likely to track within 2006 levels, given current metal exchange inventory levels and still acceptable demand fundamentals.
But while supply and demand in 2006 have remained relatively balanced, 2007 could show a modest surplus position as new capacity comes on stream. Therefore, Moody’s expects that overall cost pressures could continue.
Nickel
Nickel prices have been on a year long rise as stainless steel demand remains strong, inventories have dwindled to just over one days supply, supply disruptions have continued and new mine supply has been delayed.
The International Iron and Steel Institute Steel previously forecast China’s steel consumption this year would likely be between 320 million and 330 million tonnes, up from 300 million tonnes in 2005 and 272 million in 2004.
China already makes up about 30% of total world steel demand. Steel consumes approximately two-thirds of nickel produced.
“Substitution to lower grades of nickel in stainless steel production, and scrap supply have been past deterrents to nickel prices, but their impact this year has been clearly minimal, perhaps as these elements are reaching their limits,” said Moody’s.
In addition to the strong demand from the stainless steel sector, the metal is also benefiting from resurgence in the aerospace sector, according to Moody’s.
Prices will also be supported by project delays, with BHP’s Ravensthorpe now not expected to begin production until early 2008 and CVRD’s Goro not expected until mid-2008.
“It is now accepted that this year’s expected deficit could occur again in 2007,” said Moody’s.
Moody’s said it expects a price correction from current levels, “which could be significant,” but believes that the price will remain high next year.
Zinc
Like the other metals, the zinc price has been on an upward trajectory as demand, again from China, has remained high and inventories have declined significantly.
Strong demand from China, as a net importer, “is likely to continue as it expands its galvanizing capacity” in construction, automotive, aerospace and pharmaceuticals, said Moody’s.
According to the report, supply has remained tight, with no significant developments taking place in the last several years and with no significant new development currently planned.
There will be some re-starting of formerly concluded production with prices at these levels, but such opportunistic undertakings “will not increase supply sufficiently to negatively impact the market,” according to Moody’s.
Similar to nickel, the greatest risk to zinc is reduction in demand for galvanized steel, but this is a sector that is forecast to perform well again in 2007.
“As with copper and nickel, Moody’s believes the zinc price is likely to correct, but nevertheless remain at attractive levels for producers,” said Moody’s.
Conclusion
Moody’s 2007 outlook for the global base metals industry continues to be favourable, despite a potential fall back from current prices.
As far as in the nearer term, Adams believes base metals may be watching copper’s next move.
“Although the other metals are in a different boat to copper in that many of them are much closer to their record highs than copper is they do still seem to be watching copper with interest and it in turn is acting like a dragging anchor on them,” he said. |
