Expect traded metals price averages to slip in 2005

Staff -- Purchasing, 3/3/2005

With world growth slowing, average prices for most London Metal Exchange (LME) traded metals are expected to be falling throughout 2005 as output starts to catch up with demand.

That's the conclusion of a twice-yearly poll of almost three-dozen analysts conducted by Reuters News Service and consultancy CRU International.

In 2004, prices were generally much stronger than predicted and some base metals hit their highest levels for up to 16 years. China consumed record quantities of commodities, U.S. consumption bounced back sharply after a poor 2003, and investment funds and speculators piled into the commodities market as the dollar weakened. Also, a run of landslides, hurricanes, strikes and power cuts held back Asian production, leading to the rapid erosion of global inventories.

China and the dollar will be key swing factors in the market, with most analysts expecting Chinese demand to register more sedate gains in 2005. Most of the market gurus believe fundamental supply/demand factors, not currency factors or speculative buying, will drive the markets in 2005.

And, while tight supply was a common characteristic of most nonferrous metals markets in 2004, a majority of the analysts see several commodities moving back into balance—or even surplus in 2005. "With slowing metal consumption growth, markets will eventually turn towards surplus, as producers at last respond to this three-year period of bonanza commodity prices," says analyst Nick Moore at ABN Amro in London.

The analysts also suggest that the tightness in supply early this year will keep copper prices at historically elevated levels. The median forecast for LME cash copper in 2005 is $1.23/lb, dropping down from 2004's average of $1.30 because, as the year progresses, the copper market will move back into balance. Demand for copper exceeded production by 684,000 metric tons in 2004, according to Barclays Bank in London, which sees the supply gap narrowing in 2005 to 150,000 metric tons. "The production gloves are now well and truly off. Copper producers around the world are busy maximizing their production to harvest the fruits of this high-price cycle," says ABN Bank's Moore.

Western copper demand will rise 6.3% to 6.3 million tons in the first half, exceeding production from mines and smelters by 87,000 metric tons, says the London-based Metal Bulletin Research. By the end of the year, production will catch up, leaving a surplus of 174,000 metric tons, Metal Bulletin Research projects. Meanwhile, Art Miele, senior vice president of marketing and sales at Phelps Dodge Corp., the world's second-largest copper producer, forecasts that demand growth in the U.S. and China will slow this year to 5%, compared to a gain of 7.5% last year.

Average nickel prices are projected to drop 6% in 2005 to $5.90/lb from $6.28 in 2004 while tin was forecast to average $3.68/lb, down from $3.86/lb and lead prices were seen dropping to 38¢/lb from 40¢/lb. One exception to the falling-price forecast is LME spot aluminum, which is forecast to average 81¢/lb. LME aluminum averaged 78¢/lb in 2004, compared with 65¢ in 2003. Another exception is zinc, where analysts peg prices at 53¢/lb in 2005, up a nickel from 48¢ in 2004. The big issue in this market is that large Chinese smelters have been forced to cut production temporarily by a third in the first quarter of 2005 due to power shortages.

High nickel prices sent consumers scurrying towards substitutes and scrap metal in 2004, and now new nickel capacity is being readied, causing many analysts to significantly downgrade their 2005 supply deficit estimates. "We all know nickel supply is tight and that there are many uncertainties for production from new projects, but overly high prices will continue to scare away consumers," says analyst Xu Aidong in Beijing at state-controlled Antaike Information.

Reflecting the view of most experts, analyst Robin Bhar at Standard Bank in London suggests the aluminum market is leaning toward tightness because of a sharp reduction in stockpiled metal. However, there are analysts, such as Societe Generale's Stephen Briggs, who are wary of unreported stocks in both markets. "We still are convinced that much unreported aluminum inventory exists," he says. "This may limit price progress so by the time aluminum end-use demand is firing on all fundamental cylinders, speculative interest in metals will have waned."