Just days after forecasting a slight recovery in nonferrous metals prices for 2003, market researchers at J.P. Morgan—as well as the mavens at Merrill Lynch, Macquarie Bank, Standard Bank and Scotia Bank—have revised their projections downward. The initial forecasts for 2003 pricing (PUR: Oct. 10, '02: p. 24B15) were modest at best, but have been erased by new downgrades caused by a combination of less-than-stellar expectations for a global economic recovery, lower industrial production forecasts, continued excess supply of base metals and concerns over tensions and possible intensified military actions in the Middle East.

The researchers in Toronto, London, Sydney and New York all agree that nonferrous markets lately have been characterized by oversupply, high inventories and weak demand. "We always were a little cautious toward 2003 pricing," suggests Standard Bank's analyst Robin Bhar. "All of our prices were mid-range, being neither too bearish nor too bullish; still, now we're pretty much united in cutting them."

The capital investment boom of the late 1990s has gone, so nonferrous markets worldwide have been weak for many months. Anecdotal reports so far this year suggest that much buyer interest has been just to cover immediate needs and hasn't reflected any real improvement in end-use markets. A review of demand trends by Macquarie Bank, for example, found year-on-year declines for zinc, lead and copper at midyear, and only marginal growth for nickel and aluminum.

J.P. Morgan analyst Nick Moore says the metals marketplace has been "robbed of the oxygen of demand growth," so prices are being depressed by "premature capacity reactivations." He and colleague Martin Squires say the global marketplace needs substantial producer cutbacks. Since that will take some time, and they believe global industrial growth also will grow slowly for some time, "we do not envision robust commodity prices until early 2005."

The latest consensus copper price forecast sees the 2002 spot-sales average for London Metal Exchange (LME) cathode dropping to 71¢/lb this year (from 72¢ last year) and then recovering only to 77¢/lb in 2003. Earlier, the mavens had seen 2002 copper at 74¢ and 2003 cathode at 82¢/lb, but global demand continues to slide because of collapse in the telecommunications end-use market. "In copper, in particular, it's the total lack of discipline by producers as they continue to produce more than the markets demand," says Merrill Lynch analyst Daniel A. Roling. "Unless we see a change with producers scaling back production, our feeling is that the imbalance is only going to get worse."

Spot aluminum averaged 65¢/lb in 2001 and had been forecast to rebound briskly this year. However, the term "structural oversupply" continues to be used to describe the world aluminum market, and is behind the cutback in price forecasts for LME ingot. The problem is that a slight uptick in early-2002 demand triggered a global increase in production that has clogged the market with unneeded metal. So, the analysts now suggest the price will average 61¢ this year, and rebound no higher than 63¢/lb next year. Excess supplies from sources such as China are expected to continue to flood the market. "World consumption will have to be much stronger than we think it's going to be to soak up all of the metal that's going to be available," says Standard Bank's Bhar.

The analysts generally agree that zinc, lead and tin will stay weak. Zinc is forecast at 38¢ in 2003 after averaging 35¢ this year and 40¢ in 2001. Lead is projected to rise to 23¢/lb next year after slipping to an average 21¢ this year from 22¢ in 2001. The tin outlooks are uncertain, but generally in the $2.10-$2.15 range, after selling in a range of $1.80-$2.05 for the past two years.

However, there are some wide differences in the outlooks for nickel, which fell from almost $4/lb in 2000 to just about $3/lb in recent months. The consensus forecast is $3.58/lb but the outlook revolves around Russian supply as much as world demand. In April, Russia's MMC Norilsk Nickel, the world's largest producer of nickel, collateralized 60,000 metric tons of the alloying metal from its strategic reserve under a three-year $240 million loan.

Thus, Macquarie Bank's forecast notes: "The key to nickel remains the disposition of Russian stocks. In 2003, we are assuming that none of the 60,000 metric tons or so that Norilsk has used as collateral for a three-year loan will be sold on the open market." It projects LME nickel at $3.50/lb in 2003. So do the analysts at Toronto's Scotia Capital and Bhar of Standard Bank, who says, "The supply side for nickel isn't that excessive." Scotia Bank also sees $4/lb nickel in 2004 because of supply deficits emerging due to "a limited upside for supply fueled by higher stainless steel demand." Squires of J.P. Morgan agrees that "nickel continues to exhibit healthy fundamentals driven by rising stainless steel production and the removal of an inventory overhang fear from Norilsk." Still, the J.P. Morgan forecast sees 2003 nickel at $3.15/lb "since we believe other metals have greater demand and price upside."