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NAB Suggests Base Metal Prices Are Peaking

Commodities | May 24 2007

By Chris Shaw

In its latest monthly report on the base metals sector by economist Gerard Burg the National Australia Bank suggests while average prices have risen strongly in the year to date the market is potentially at a peak, though price direction will continue to depend on the direction of nickel prices in coming months.

The bank’s BMI (Base Metals Index) rose 9.7% in April to an average of 454 points, driven by ongoing strength in nickel prices, but Burg expects the average reading for 2007 will be something in the order of 416.5 points, which would still be a year-on-year increase of 36%. With volatility in prices high there is some risk attached to this forecast, though he notes if nickel prices stay firm then prices broadly should continue to be supported.

Looking ahead he expects the BMI to record a decline of 22% next year, though it is worth noting this would only bring prices back to their levels of early 2006. This reflects the still strong global demand outlook, where a slowing in US demand is being offset by ongoing strength in both China and India. While there remain some concerns over the state of the US economy Burg sees a recession as unlikely, though he cautions such an outcome would have a negative impact on metal demand globally.

As at the end of April nickel stockpiles at the LME accounted for just 1.3 days of consumption, so it is little surprise the metal has performed so strongly in the year to date. Supplies have been unable to keep pace with demand from the stainless steel sector, with the bank seeing little hope for an easing of the current tight conditions in the medium-term.

The bank has acknowledged this tightness in revising its nickel price forecast higher, though it remains cautious about the outlook for stainless steel demand at such price levels so its revised estimate is below recent peak prices. For the year it expects an average price of US$44,200 per tonne, up from its previous forecast of US$35,057. As with the other metals it sees prices declining into 2008, with its forecast for an average nickel price of US$31,875 per tonne.

With respect to copper the bank sees a narrowing of the global market balance, as while demand should increase by around 4.2% globally there will only be a corresponding 3.8% increase in supply. With LME stockpiles already low at around 3.2 days supply it is little surprise the red metal has gained in price this year on the back of restocking by the Chinese, the metal averaging US$6,382 per tonne so far in 2007, up about 20% year-on-year.

Given a likely tight market the bank has lifted its average copper price forecast to US$6,950 per tonne for the year, up from US$6,308 previously, though it expects prices to fall from this level next year to an average of US$5,900.

Aluminium prices have risen about 14% year-on-year so far in 2007 though stockpiles have increased slightly. The bank expects a surplus of around 200,000 tonnes this year so it sees prices easing back from current levels to an average of US$2,650 per tonne, before falling to an average of US$2,125 per tonne in 2008.

Lead prices have benefited from production disruptions that have led to a decline in stockpiles, with LME supplies of only 1.8 days of consumption as at the end of April. While global consumption and supply were expected to be largely in balance this year a loss of output from the Magellan mine in Western Australia could tip the scales towards a tighter market, so the bank has lifted its average price forecast for this year to US$1,850 per tonne, up from US$1,385 previously. Again this year’s price is expected to be the peak as the bank is forecasting an average price in 2008 of US$1,100 per tonne.

Zinc prices in contrast have struggled this year even as fundamentals have remained supportive, the price ending April around 20% lower than it finished in 2006. With Chinese demand still strong and a production deficit likely for the year the fundamentals continue to look solid, but the bank has lowered its average price forecast to US$4,000 per tonne from US$4,088 previously. Its forecast for 2008 is an average price of US$3,875 per tonne.

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