Manufacturers will pay more for raw materials in '04
Tom Stundza -- Purchasing, 4/1/2004 2:00:00 AM
Nonferrous metals currently are in an acute supply shortage globally. That's why miners and mavens alike are forecasting substantial increases in 2004 market prices of aluminum, copper, nickel, zinc, lead and tin. In fact, "substantial price inflation" has become the new consensus outlook for the nonferrous metals traded on the London Metal Exchange (LME).
"We now expect all base metal prices to register double-digit growth from the last quarter of 2003 to the expected peak during 2004," says analyst Ingrid Sternby at Barclays Capital in London. The main influences on the market are consumption in China, the global economic up-cycle, currency fluctuations and world supply tightness. Dan Roling, analyst at Merrill Lynch in New York, suggests that overall world demand will be exceeding supply all year, "and that's why prices are going up."
Maqsood Ahmed of Credit Lyonnais Rouse's London office adds, "The continuing weakness of the dollar will also support prices." And all the mavens believe the LME metals will continue to be perceived as investment vehicles by speculators and fund managers.
"Synchronized global economic growth, the first in a decade, will see base metals extend their gains in 2004," says Standard Bank of London analyst Robin Bhar.
"The strength in metals prices over the past six months is testament to the fact that fundamentals in all markets are genuinely tight," adds Edward Meir at the Man Financial metals brokerage in New York. "By and large, the nonferrous metals complex looks quite strong and the bull market could carry itself well into 2005."
Chinese industrial growth defies gravity so, unlike previous years, there are no large production restarts or Chinese exports coming into the world market to derail price rallies. "In the past, it was usually the Chinese who were more than willing to export a large quantity of metal whenever prices rose," says Meir. "In this current cycle, the 'China factor' is notably missing. Instead, the Chinese have reverted increasingly to the buy side of the trade equation, or failing that, they are keeping more of what they used to export. By so doing, they are aggravating the metals supply/demand balance even more."
Note that metals producer Teck Cominco of Vancouver, British Columbia, now expects to see a 300,000-metric-ton deficit in the zinc market in 2004, which should result in declining LME inventories. David Thompson, chief executive, is seeing a strong zinc market in Asia, largely driven by sales into China, and has noticed a strong pickup in the U.S. market. Rising zinc premiums in the U.S. mean that, sooner or later, zinc should be released from LME warehouses in the U.S. There have already been LME warehouse drawdowns in Europe and Singapore
Meanwhile, the Bear Sterns investment house is citing as a key example the "robust forecast for copper demand and pricing" in its nonferrous market outlook for 2004. The company says, "Strengthening global demand is expected to exceed both new supply growth and returning idled capacity, taking above ground inventories to levels historically associated with higher copper prices."
"China leads the pack in demand growth," says Mike Salamon, senior minerals executive at Australia's BHP Billiton Ltd. "But, the U.S. is back. North American metals consumption, led by the U.S., is rising again, while growth in demand from China, the world's biggest user of copper, is showing no sign of a slowdown." He agrees with the Bear Stearns expectations of copper averaging $1.10/lb this year and rising to $1.30 in 2005.
Nonferrous metals prices are expected to erupt
(annual average, ยข/lb)
| Aluminum | Copper | Nickel | Lead | Zinc | Tin | |
| SOURCE: HISTORY/LONDON METAL EXCHANGE; FORECAST/ANALYST CONSENSUS |
||||||
| 2000 | 70 | 82 | 392 | 21 | 51 | 247 |
| 2001 | 65 | 72 | 270 | 22 | 40 | 203 |
| 2002 | 62 | 72 | 326 | 20 | 36 | 192 |
| 2003 | 65 | 81 | 440 | 23 | 37 | 223 |
| 2004(f) | 72 | 100 | 566 | 29 | 47 | 261 |
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