Base metal prices will be wobbly in 2001

By Staff -- Purchasing, 2/8/2001

Base metal prices aren't expected to make much headway in 2001, say the commodities analysts at Commonwealth Bank of Australia in Melbourne, who believe the prospects of a sharp downturn in the U.S. economy and slowing world economic growth will temper demand.

"Market prices probably will be stable for aluminum and copper, as constrained supply largely will be offset by falling demand," says analyst David Thurtell, "while an abundance of nickel and zinc will put downward pressure on prices."

Merrill Lynch & Co. in New York has forecast that London Metal Exchange (LME) copper this year will rise to 87¢/lb in 2001 from 82¢in 2000. David Meger, senior metals analyst at Alaron Trading Corp. in Chicago, thinks copper gradually will move higher throughout the year from a positive impact of recent Fed rate cuts. These could brighten the economic situation and tighten supply, pushing LME copper from 80¢at the start of the year to 90¢(or higher) later in 2001-for an 85¢average.

However, most other analysts foresee the LME copper average closer to 83¢for this year. A five-month slide in U.S. manufacturing activity through December has undermined the optimism about a dramatic copper price rebound that might have been generated by the surprise Fed interest rate cuts in January. The U.S. accounts for 20% of refined copper use, so the state of manufacturing is important to the world red-metal market, notes analyst Peter Hollands at Bloomsbury Minerals Economics in London.

Atop that, Asia accounts for at least 30% of the world's copper use and last year's growth in Asian copper consumption was due mostly to U.S.-bound exports of copper-containing high-technology goods. "So, the macro-economic implications on copper demand and price from a possible 2001 slide in U.S. manufacturing are obvious," says Hollands.

Merrill Lynch expects LME aluminum prices to rise this year to an average of 76¢/lb in 2001, as compared with 70¢in 2000. Their rationale is that supply will be tightened by the production shutdowns at Pacific Northwest smelter shutdowns and that growing sales to automobile producers will boost demand. The consensus forecast now is just 73¢, though, as steep first-quarter cutbacks in motor vehicle manufacturing in North America is tempering their optimism about sales of the light metal.

Given slower economic growth and a resulting decline in consumption in the U.S., there may not be as much pressure to bring all the U.S. smelting capacity back on stream right away, says Wayne Atwell, analyst at Morgan Stanley Dean Witter in New York.

"Nickel is going to remain fairly volatile," but on the downside, says economist Keith Huggan at Westpac Banking Corp. in Melbourne. Demand is in question because of the apparent world glut of stainless steel, which accounts for 75% of nickel's use. Analyst Mike Gambardella at J.P. Morgan Securities in New York says that high inventories at the service centers will cause a slowdown in buying from domestic and foreign mills during the first half of this year, pressuring prices downward and forcing producers to cut output from 2000 levels.

There is plenty of Russian nickel available for sale at any time, according to traders, who say that material has been kept out of so-called "official" commodity exchange warehouses-so it hasn't been counted when world stocks are tabulated. Atop that, Huggan says, Australian nickel producers employing new technologies to produce nickel and cobalt from dry laterite ores will boost supply dramatically this year. These producers are expected to push their operations up to design capacity as 2001 evolves.