The metalworking economy is sputtering, yet nonferrous metal prices have been soaring, much to the annoyance of buyers at manufacturing companies. "Nonferrous tags are way too high for actual demand," says the purchasing and logistics manager of a Texas company that makes fasteners, lubrication fittings and machinery components. He's particularly upset with the cost of aluminum, copper and nickel.

Lately, there have been profit warnings from Blue Chip companies, weakening retail sales, falling manufacturing output and record-high trade deficits. Yet, buyers such as the materials estimating and project manager for an electrical construction company in Utah remains annoyed about several base-metal prices. He says that copper price volatility, especially, "is having a significant impact on our pursuit of new projects."

What's bothering buyers: Base metal pricing, which increased by 49% in 2004, inflated by another 7% at midyear—some 18% ahead of forecasts. The reason: "Nonferrous metals are traded daily and the commodity marketplaces have been showing little interest in reacting to reality," says analyst William Adams at BaseMetals.com. So, there has been considerable upward volatility in commodity metals in the first half.

"The bottom line, for the first six months of 2005, is that all the base metals are under-supplied," says Neil Buxton of GFMS Metals Consulting in London. "So, base metals' prices have been staying stronger for longer than expected," he adds, also because of the weakness of the dollar and, importantly, continued speculative activity by investors and commodity speculators

Nick Davis, chief executive of major copper and zinc producer Xstrata in Zug, Switzerland, isn't at all surprised that there has been a period of high commodity prices because of earlier global underinvestment in exploration, mining, smelting, and refining projects. Earlier this year, he suggested to shareholders that "the bullishness in the commodities market will continue for some time." However, like Janus, the Roman god of beginnings and endings, 2005 is likely to have a double-faced head—in other words, analysts now expect severe downward volatility to begin in the second half.

Most metal market analysts entered 2005 forecasting a demand and pricing peak in the fourth quarter and what one called "significant slippage" in 2006. One of the 2005 bulls, Ethan Harris, chief U.S. economist for brokerage Lehman Brothers, explains his position: "The fundamental drivers of growth—easy financial conditions, booming wealth effects from the housing market and corporate catch-up in hiring and equipment investment—remain in place for all of this year." Still, he recently did drop the first-quarter estimate for gross domestic product (GDP) to 3.7% from 4.5% and the second-quarter forecast to 3.7% from 4%.

In recent weeks, other economists have sliced their first-quarter GDP forecast to 3.5% from 4.3% and put the second quarter at 3.2%. They also have been reducing the second-half GDP growth rate even more, and cutting back the projected need for metal—noting that high gasoline prices probably have dented consumer sentiment and siphoned some disposable income away from other goods and services—and, thus, suggesting an imminent reduction in late 2005 nonferrous pricing.

Bird's-eye view: The use of refined copper is firm in China, but other countries (particularly the U.S.), are reducing consumption. Meanwhile, mine production worldwide is rising by 11%. Prices have become chaotic lately, reacting to speculative interest that is based on dollar values against the euro.

Copper has been a raging bull market for the past four and a half years. China has been using record tonnage of the red metal as it electrifies its vast nation. With global supplies tight, the copper market has registered a major turnaround in the past 18 months; after a five-year crisis that saw some of the lowest sales tags ever, this year's London Metal Exchange (LME) prices are 14% higher than the pace-setting 2004 average.

Copper has been the second-best performer in the base-metals sector this year, lagging only zinc. But the steadily rising prices and tight supplies might soon be coming to an end. Analysts believe that the average annual price of copper will remain high in 2005, but most of them foresee a slight decrease from the 2004 level. "Most people are expecting a slowdown since copper demand and prices have been at historic highs," a trader tells the Platt's News Service. Copper is under pressure again, with prices sliding from greater availability of metal in China

Since the beginning of this year, LME cathode has traded for a very strong average of $1.48/lb—vs. $1.30 for all of 2004, and way more than the January consensus forecast of $1.23. Buyers can look for the copper price to drift lower during the second half of the year, though, says analyst Mike Gambardella at J.P. Morgan Securities. "It's only natural that we are seeing a pullback in pricing," he says, "since the big investors seem to be reevaluating their positions in commodities in this weakening economic environment."

LeAnn Baker of Investor Resources Ltd. tells the Institute of Scrap Recycling Industries' annual convention in New Orleans she agrees that prices already might have topped out in the first half, and are likely to decline during the next two years as supply and demand move closer into balance. Some copper producers are restarting several of their older mines; as a result, copper supplies soon might be more plentiful. Baker agrees with Purchasingdata.com surveys that show copper consumers are eating up less and less of the stocks held in inventory by exchanges.

The Brook Hunt metals consultancy says many cathode consumers—not just in China but in Europe and the U.S. as well—have become increasingly unwilling to buy additional metal for some weeks. That's been partly because extensive investment funds' involvement in the first half artificially raised prices and partly because of the reluctance within the highly competitive end-use markets to accept price hikes. That's why pricing premiums that merchants and producers were imposing on copper are down from the highs seen earlier this year.

Timothy Snider, president of Phelps Dodge of Phoenix, the world's second-largest copper producer, agrees that "cathode prices should moderate in the second half as more metal hits the market."

J.P. Morgan's commodity research analyst, Jon Bergtheil, now expects global copper mine production to increase 8.1% in 2005 and world refined production to grow by 7.8% over 2004 levels. This pace of production growth outstrips expected consumption growth of 3.5% and should boost inventory levels and lead to lower prices. Bergtheil sees second-half copper $1.29/lb, bringing the full-year forecast to $1.39—which is somewhat more bullish than a new consensus of $1.32.

Birdseye view: The lofty starting price point for ingot means the 2005 average global price will be higher than in 2004. But, scaled-down purchasing by metalworking companies became evident in May. So, primary ingot production growth will ease second-half market tightness; atop that, speculative players will become disinterested.

The world aluminum market fell into deficit in 2004 because of tight global supply of base-material alumina and strong consumption growth of the smelted metal, especially in China. So, prices rose. Total world demand growth was 9.3% in 2004, supplied by production that grew by 6.7%. The region with the highest demand growth was China (17%), the U.S. (11 %) and the rest of Asia (8%). Early 2005 forecasts had market analysts looking for world growth of 5-6% for the light, white metal. But, that has been downgraded to 3-4% growth—and that will curb rampant inflation.

Aluminum shouldn't be in severely short supply, although ingot inventory is declining since production growth is expanding. While the consensus forecast has the global deficit at 705 billion lb, some recent revised forecasts have cut the deficit to 485 billion lb, and all published analyses agree that 2006 will be a year of surplus.

LME aluminum ingot price average increased from 65¢ in 2003 to 78¢ last year. The early consensus outlook for this year was 81¢, but that has been adjusted upward to 88¢. Gambardella suggests that, like copper, the aluminum price on the LME will begin to weaken in the second half of 2005.

In the first quarter of 2005, alumina supply loosened even though prices remained high at $430-435/ton for Australia, in late March, indicating still strong buying of spot material by Chinese smelters. Then, aluminum production started to increase ahead of demand in the second quarter when it became obvious that use in Asia (outside China), Europe and North America wouldn't be meeting earlier expectations. In 2005, some 3 million metric tons of new alumina-refining capacities will enter the market. So, world smelters will no longer be constrained by tight supplies of alumina.

That's why J.P. Morgan analysts believe that a global aluminum deficit of 321,000 metric tons in 2005 could turn into a 70,000 metric ton surplus in 2006. China's power situation continues to improve so much that the country remains committed to adding nearly two metric tons of aluminum capacity by the end of 2007 despite having shut down approximately 800,000 metric tons of older capacity in 2004.

As a result, J.P. Morgan's commodity research analyst Jon Bergtheil expects increased capacity slated to come on line in late 2005 through 2007 "should keep the global supply of aluminum relatively plentiful for the rest of the decade despite strong growth of consumption expected from Asia." James King, a consultant who was a panelist at the annual convention of the Institute of Scrap Recycling Industries in New Orleans, says increased Chinese production could mean price declines in 2006 and 2007.

Birdseye view: Hampered by a lack of spare capacity, nickel producers have been unable to increase supply quickly. However, analysts generally believe the recent high nickel price is attracting more mining projects which will drive prices lower in 2006.

Nickel, the alloying and plating metal, will remain in tight supply for the immediate future, according to Sven Tollin, chief statistician of the International Nickel Study Group. Speaking at a recent metals conference in Hong Kong, Tollin opined: "Even if users would like to have more material, it will not be available and prices could remain on the high side for some time to come." French nickel producer Eramet supports that view, arguing in its financial report for 2004 that the nickel market could again be in deficit this year and, thus, buyers should expect average prices matching those of 2004.

A report from the Ministry of Natural Resources and Wildlife for the Canadian province of Quebec notes: "Global consumption of primary nickel should expand at a faster rate in 2005, particularly since China appears to have stopped selling off stockpiles. Atop that, international stainless steel production is continuing its upward trend."

LME nickel moved to $6.27/lb in 2004 from $4.37 the year before. Nickel prices surged even higher during the first quarter as demand remained strong, inventories low and new supplies limited. Brook Hunt analysts actually suggest the first-half market may be in deficit right now. At midyear 2005, LME nickel is averaging $6.69. The full-year 2005 nickel estimate consensus goes to $6.61/lb since most analysts are forecasting a small LME nickel surplus by year's end. However, they also caution that pricing may be lower if demand from stainless steelmakers has reached a cyclical apex or is close to peaking late this year.

Looking ahead, global production, led by Inco's Voisey's Bay and Goro mining/smelting projects, could grow by as much as 18% between 2004 and 2007. J.P. Morgan's metals economists believe this would be adequate to cope even with the 4% average annual global demand growth that such suppliers as Inco expect to see in that timeframe.

Most analysts believe the world market should be close to equilibrium or show a small shortfall in coming years. However, there is some weakness becoming evident in the stainless-steel market, the key nickel-using sector.

In North America, substitution pressures still are an issue that threatens to weaken nickel demand. Factors such as the recycled stainless steel supply and substitutions could always come into play and change the picture, say analysts. "High alloy prices (especially molybdenum and nickel) are affecting the demand for stainless sheet, encouraging talk about a slight shift toward ferritic grades," says Gambardella at J.P. Morgan.

Also, while some researchers assume that Chinese nickel demand will grow by more than 30% in 2005; high prices have triggered substitution of manganese for nickel. "High prices appear to be affecting consumption in China," says economist John Mothersole at Global Insight, "where year-over-year growth is down. Because of this, global consumption growth will slow later in 2005, helping the market deficit shrink."

Birdseye view: Output from numerous smelter projects globally will boost second-half supply, but that's not why pricing may be dragged down. Global consumption of refined zinc may not grow as well as last year. Reason: Sales of galvanized products for manufacturing and construction may be depressed in the second half.

Price-inflating zinc-market fundamentals leaned toward high prices in 2004 when global use rose by 5.6%, well ahead of the 4.8% forecast. But 2005 has become a question mark. The projected 5.8% demand growth forecast is in jeopardy. In fact, even the more conservative 4.3% demand increase projected by the International Lead Zinc Study Group may not occur. Reason: The possibility that high crude-oil prices will cut economic growth in the U.S. and Europe, two major world zinc-consuming regions. The experts foresee continued reduced purchasing of galvanized steel sheet by the automakers and auto parts producers.

World production was expected to expand slowly, anyway, due to short supply of concentrates, the raw materials smelted into metal. So, say the mavens, the world's refined zinc market should continue to exhibit a deficit. In addition, Chinese exports may keep moving downward in 2005, and some analysts are even suggesting that China will be a net importer. The report from the Ministry of Natural Resources and Wildlife for the province of Quebec adds: "Buoyancy of market fundamentals for zinc should allow the average annual price to rise again in 2005, although more modestly than last year."

World consumption grew by 4.2% in 2004. For 2005, some bullish analysts forecast world consumption growth of 5% with China, Russia and North America leading end-use demand. That's why most mavens initially expected the market deficit to widen in 2005. However, full-year consumption appears to be stuck at the 4.2% growth rate of 2004 and, with expanded output evident worldwide, the deficit is now projected to shrink to about 90,000 metric tons.

Increased usage of galvanized (zinc-coated) steel in China is a given since demand has benefited from investment in infrastructure projects such as the construction of new roads, railways and power transmission facilities and the rapid expansion of the housing, automotive and white-goods sectors. It still is expected that Chinese use of refined zinc will increase by 10-11% again this year. But, in the U.S., especially, the reduction in automotive production in the first half is causing economists to downplay earlier views that in-creased shipments of galvanized steel this year will be the main influence on a predicted rise in demand of 6-7%. And, now, the market watchers are reinforcing their views that zinc demand in Europe will rise by 1.5%.

World zinc prices increased by a dime to 48¢/lb in 2004, when demand did surge, and the early consensus forecast had suggested another nickel hike in 2005. Instead, the midyear LME price of 59¢ is just what the experts now are looking for as the full-year average. In effect, while the rate of demand growth and the increase in pricing was healthy in the first half, the mavens now are suggesting no improvement either in the second six months. Even the most bullish forecasters are projecting only 60-61¢ as the annual average, and only if there are smelter shutdowns caused by fires or floods.

The zinc metal market recorded a deficit of almost 207,000 metric tons in 2004, the first global supply shortfall since 1996. It is predicted that global zinc mine supply will increase by 5% to 10.27 million metric tons in 2005. Decreases in supply in Australia and Peru in 2004 will be more than balanced by increases in Canada, China, India, Ireland, Sweden, the U.S. and Namibia, where output at Anglo American's Skorpion mine is nearing full capacity.

Refined production only rose 2.7% last year and is expected to be in slow-growth mode again this year. However, the London-based International Lead Zinc Study Group reckons a 4.7% increase in world production—the accumulated total of expansions in places as far flung as China, Australia, India, Ireland, Mexico, Namibia, Peru, Sweden, Norway and the U.S. Production increases also are expected from Canada, South Korea, Kazakhstan, where Kazakhmys's new Balkhash plant is expected to be running at close to full capacity.

Economist Mothersole at Global Insight explains that expansion in mine capacity during the 1990s was excessive and placed zinc in a chronic surplus condition. The industry has taken corrective measures since then; mine production rose a small 2.6% in 2003 but then fell 7.0% in 2004. Slab (refined) production reflects the relative scarcity of concentrates and grew just 2.7% in 2004. Mothersole explains the key to any 2005 forecast is whether refiners will continue to restrain production to a modest 2.5%. However, other analysts believe restraint isn't in the cards because merchants need the money.

Birdseye view: In the U.S., lead usage continues to be adversely affected by the shift of battery manufacturing to lower cost regions, in particular Mexico and China. Even with a dramatic global cutback in production, there's capacity aplenty.

Global demand for refined lead rose by 2.4% in 2004 due mainly to increased purchasing in China, Europe and Southeast Asia, more than offsetting reduced buying in the U.S. and Japan. U.S. consumption has been slipping, falling under 1.5 million metric tons, which is 15% below the peak of 1.8 million metric tons recorded in 1999.

Following a sharp decline in 2003, European usage grew by 5.5% primarily due to rises in the Czech Republic and Spain. The continued rapid rise in the production of starter, lighting and ignition (SLI) and industrial batteries was the main driver behind a 6.2% increase in China. In fact, Chinese demand for refined lead metal has more than doubled in the past four years.

There was a small 0.5% decrease in global lead mine output in 2004 with a reduction in the U.S. balanced by an increase in Ireland. Output in other countries remained at previous year levels. The three largest producing countries—China, Australia and the U.S.—accounted for two thirds of world lead mine output in 2004, with China alone accounting for 31%. The impact of a significant 13.2% increase in Chinese output of refined lead metal was largely negated by reductions in Europe, the U.S. and Australia resulting in a small overall increase in world output.

So, cash settlement prices on the LME averaged 40¢/lb last year, as compared with 23¢ the previous two years. Reason: Supply has been sliding steadily. The initial consensus forecast for 2005 was slippage to 38¢, but this has been replaced with 41¢, to be followed by 32¢ in 2006.

European production has been reduced by 4% since 2003. A supply cutback of 8.5% of capacity in the U.S. was mainly a consequence of the closure of Doe Run's 125,000 metric ton per year Glover operation in November of 2003. A reduction in Australia was influenced primarily by the cessation of operations at Zinifex's Cockle Creek plant in September 2003. A drop in Moroccan output was due to a combination of industrial and technical problems at Zellidja's lead plant at Oued-el-Heimer. Elsewhere, there were increases in Canada, China, Mexico, Kazakhstan and Peru.

The toxic metal is used in more than making lead-acid batteries for automobiles and trucks. The SLI batteries also are used as uninterruptible power-supply equipment for computer and telecommunications networks and hospitals; for load-leveling equipment for commercial electrical power systems; and as traction batteries used in airline ground equipment, industrial forklifts, mining vehicles and golf carts.

About 11% of lead is used in ammunition; casting material; radiation shielding sheets; pipes, traps and extruded products; cable covering, calking lead, and building construction; solder; and oxides for glass, ceramics, pigments, and chemicals. The balance is used in ballast and counter weights, brass and bronze, foil, terne metal, type metal, and wire.