While nonferrous metal markets are reported to be on the mend, the rebound is modest. In fact, nonferrous consumption still is flat in a year-to-year comparison in North America, Europe, and Japan. Moreover, inventories on the commodity exchanges continue to build, and still represent a price-depressing overhang in the market. Indeed, many average prices will be lower this year than in 2001. That's also because the outlook for metal consumption is hardly sanguine.

Growth in worldwide industrial production is shaping up to be fairly weak in 2002—not even on a par with 1998, which saw the worst of the fallout from the Asian debt crisis of 1997. This means consumption growth is unlikely to exhibit strong gains until late this year or 2003. After falling 2% in 2001, growth in worldwide industrial production is slated to be just 0.4% in 2002. A weak rise in industrial production implies an equally weak rebound in metal consumption. With capacity ample and inventories high, there will be no real lift to prices. Indeed, it won't be until 2003 that consumption growth will be robust enough to pull markets back toward equilibrium and begin to cut into visible inventories.

Nickel will be in deficit this year, while copper appears to be moving to balance. Aluminum and zinc will be in surplus again in 2002 and possibly 2003. Unfortunately, some producers are already looking at the budding recovery as a chance to restart idle capacity. Incredibly, much of the talk of returning production is for the two metals with the worst supply/demand fundamentals—aluminum and zinc. Even copper and nickel producers are hinting at reversing decisions made only last year to shut down mines or smelters. For individual companies, these decisions may make sense, but collectively, the industry could very well end up slitting its own throat. The pressure on high-cost producers will, therefore, remain intense. We expect to see a final wave of consolidations in 2002 as weaker players are absorbed, something that has been characteristic of past price cycles.

Prices hit bottom in late November but have had trouble sustaining a rally since. In their latest move, prices crumbled in late July amid worries that falling equity prices will spill over and eventually affect metal consumption. DRI-WEFA forecast sees only nickel and copper showing an average price for 2002 that is higher than in 2001. Aluminum, lead and zinc prices will be lucky to achieve 2001 averages. Overall, nonferrous prices will continue to exhibit weak upward moves into early 2003. And even this forecast assumes that producers make the additional cuts during 2002 needed to bring markets back into balance.