Big price falls across non-iron metals have been forecast for this year and next by a new commodities report.
Big price falls across non-iron metals have been forecast for this year and next by a new commodities report.
Projections by the respected London-based Natexis Commodity Markets Ltd indicate that gold, silver, nickel, copper, aluminium, lead, tin and lead prices, not already in decline, will be either in this full calendar year or next. And some of these annualised falls could be around 25 per cent.
The analysis by Natexis, part of the big Banque Populaire of France, predicts nickel prices to be down 25.3 per cent this year and a further 18.2 per cent in 2006-07. Lead is tipped to drop 12.9 per cent and 11.8 per cent, copper down 10.4 per cent and 16.7 per cent, and tin down 5 per cent and 3.6 per cent.
The current year will continue to be good for gold, up 15.9 per cent, although an 8.7 per cent fall is expected the following year.
Silver will be up 16.2 per cent followed by an 11.8 per cent decline, zinc up 12.2 per cent followed by a 6.5 per cent slide, and aluminium up 2.7 per cent ahead of a 7.7 per cent fall, according to the report.
While these latest numbers, if they eventuate, may seem a little grim on the surface, they follow some unprecedented high price levels, spawned by the strength of the global commodities markets during the past couple of years.
If anything, the view among brokers and miners canvassed by WA Business News is more likely for a slow down in commodity price rises, hopefully over a longer period, a return to more realistic prices.
It used to be that base metal prices, like any other commodity, were subject to the vagaries of supply and demand – short supply equating to higher prices.
But in the current commodity price cycle, prices have rallied almost irrespective of the funda-mentals (supply and demand).
The new major influence is the speculative investment funds, the players that spot trends, jump in and snap up supplies to capitalise on such major economic events as the rapidly expanding Chinese economy.
The good news for the miners, and bad for the doomsayers, is that the Chinese, and probably to a lesser extent the Indian economic miracles, show no signs of abating.
Such wild cards, or their ultimate scale, are a problem for groups such as Natexis, which pointed out that in the current environment: “Even the most bullish of projections for average annual prices are looking somewhat conservative”.
At a time when inventories held by the London Metals Exchange (LME), the world centre for non-ferrous (non-iron) metal trading, have been rising, so too have the prices.
“The key driver in the base metals market at the moment is the investment fund activity,” Natexis says.
“The weight of money that is coming into the sector is generating a self-fulfilling prophecy for a significant correction in prices.”
Given the latest surge in prices, Natexis says there is scope “for a significant correction in prices once the support provided by investment funds is reduced”.
When that might happen it did not say, but given its across the metals price drop predictions for 2007, it would seem that might not be too far away.
One of the best examples of investment fund intervention is nickel, 15 per cent of world market for which is supplied by Western Australia.
Prices have increased dramatically from early November 2005 lows of $US11,600 ($A15,466) a tonne to more than $US15,000/t. However, LME stocks have been rising to surplus since mid winter against a background of weak demand from the stainless steel sector, nickel’s major user.
High prices have also put increasing substitution pressure on nickel from other metals in the stainless steel production chain.
Given the extreme price volatility for which the nickel market is noted, Natexis says there is significant downside potential and the metal will remain in surplus in 2006 (at more than 5,000t) following the increase in stocks during 2005.
The analysis predict average annual nickel prices will fall to $US11,000/t this calendar year and fall a further 18.2 per cent to $US9,000/t in 2006-07.
The price of aluminium, 17 per cent of world market for which is supplied by WA, has rallied 25 per cent since October last year to more than $US2,400/tonne. In about the same period, LME inventories have risen about 200,000t to more than 700,000t.
Natexis says that, while there has been some recent big capacity closures in Europe and North America due to high energy costs, China’s production was surging ahead and this was expected to continue.
“Once the enthusiasm of investment funds has waned the market may begin to focus on the surplus,” the Natexis report says.
This would push average annual prices down to $1,950t this year and $US1,800 next.
The copper price has taken the bulls by surprise.
“Although there is the potential for prices to rally further in the short-term, we believe that copper prices above $US4,000/t at unsustainable and will ultimately choke off final demand,” Natexis says.
The Natexis view is that inventories will continue upwards and given prices are so far above the marginal costs of production, “there is significant downside potential”.
Given that, the forecaster is tipping $US3,300/t this calendar year, followed by $US2,750/t next year.
Zinc is leading the latest surge in base metal prices with LME cash prices reaching fresh all-time highs around $US2.400/t as stocks continue the downward trend begun in mid 2005.
Natexis says the combination of concentrate shortage, recent smelter closures and continued fund interest would lead to an average price of $US1,550 this calendar year, up 12.2 per cent on the previous year, ahead of a fall to $US1,450/t in 2006-07.
Macquarie Research supports this and is expecting a zinc market deficit of more than 400,000t in 2006, which could result in LME zinc stocks running out by the end of the year.
