Macquarie sees tight market for base metals, revises lead output forecasts
Source: Hoovers
Production problems and delays at lead mines around the world will likely double the market's supply deficit in 2007 and may keep lead prices extremely strong into 2008, said Macquarie Research in a weekly commodities report.
While the physical supply of copper has also tightened and may have moved into deficit in the first quarter, the Australia-based research group said prices may not rise much from current levels as demand from Chinese buyers is easing because of the high price.
Macquarie has revised its lead supply output estimate following the temporary shutdown at the Magellan mine in Australia owned by Canada-based Ivernia (IVW.T) and cuts in lead production forecasts at Xstrata's (XTA.LN) Mount Isa mine and Lundin Mining's (LMC) Aljustel mine in Portugal.
"(Disruptions) to (lead) production since the beginning of the year have already been enough for the lead market to look likely to record another deficit in 2007."
Macquarie is now forecasting the refined lead deficit for 2007 at 70,000 tons, more than double its previous estimate of 33,000 tons.
Macquarie added that production woes could continue into 2008 as the timelines of several new mine projects such as Herald Resources' Dairi project in Indonesia remain uncertain. For 2008, it is forecasting a surplus of 45,000 tons.
"If we end up taking even a small amount of additional production from our forecasts, 2008 could end up being another extremely strong year for lead."
Meanwhile, the recent rally in copper prices may be capped in the second quarter by a slowdown in Chinese buying, Macquarie said. Monday, the London Metal Exchange three-month copper futures contract was quoted at $7,450.20 a ton, up 41.9% since hitting a 9-month low Feb. 2 at $5,250/ton. The LME will re-open for trading Tuesday.
While the copper market tightened and may have been in a modest deficit in the first quarter due to strong Chinese demand, the key issue is whether this demand will be sustained, it added.
"Deterioration in the Shanghai/LME copper arbitrage would appear to imply that Chinese buying is starting to ease again at these higher prices, which could then limit the upside from here."
The outlook for nickel prices, which hit an all-time record at $50,000/ton last Thursday, will hinge on whether nickel consumers will cut purchases to the point of sending the market into surplus, Macquarie said.
"Until physical availability starts to ease, prices are not going to ease."
Macquarie noted signs of weakness are developing in European nickel demand. In this context, it added that manufacturing activity, gauging from purchasing managers' indices for March, may be slowing in the U.S., Europe and Japan, although China's strong productivity in 2007 has offset those slowdowns.
At a recent nickel conference hosted by Macquarie, industry participants said the surge in China's nickel pig iron output, which has helped alleviate the extreme tightness in the physical market, could become a bigger supply source in 2007.
Macquarie reported that the Chinese nickel pig iron producer Huaguang said output of nickel pig iron in 2007 could be much larger than Macquarie's estimate of 80,000 tons.
Also at the conference, London-based analyst firm Brook Hunt said nickel pig iron may end up being a long-term niche market due to the rising capital costs involved in developing nickel projects. |
