Demand and pricing of alloying and plating metals have been especially strong and high over the last three years. In fact, "the stars were perfectly aligned for most commodities in 2007—the year these nonferrous metals appear to have peaked at record highs, says Sherry Cooper, chief economist at BMO Capital Markets.

She is among those metals mavens who now believe slowing global growth will stall the six-year-old commodity rally. But that won't bring prices for alloying and plating metals back to pre-supercycle levels. "Although the overall level of these metal prices is expected to ease," she writes to clients, "they should remain relatively high in light of still-low inventories and solid demand growth in emerging markets."

There's a chance that the consensus prediction of a sharp drop in these nonferrous metal prices in 2009 or 2010 could be too bearish, suggest analysts Lee Downham and Tim Williams at the London office of the Ernst & Young consulting firm. In a new report, the co-authors believe that current metal prices "are actually a return to sustainable price levels following an extended period of artificially depressed prices." They say that prices are being propped by "underinvestment over the last 20 years," and add that "the level of additional capacity that the mining industry has planned appears to be, in many cases, simply inadequate to satisfy expected future demand."

Still, the consensus 2008 price forecasts for the four key alloying and plating metals are slightly less than their 2007 annual averages. That's mostly because world stainless steel production, which dropped an estimated 3% last year, is expected to slide further in 2008. The key market for zinc is galvanized steel, which faces another weak sales year because of continued slippage in motor vehicle production even more depressed than the 3% slide in last year's U.S., Canadian and Mexican assembly. Another big market for coated steel is residential construction, which looks to be lower again this year.

However, because of continued market volatility in the face of slowing global economic growth, year-on-year price forecasts are mixed. The consensus from four-dozen market mavens is somewhat lower now than in January for two (zinc at $1.10/lb vs. $1.25 and nickel at $12.82 vs. $14). On the other hand, predictions are slightly higher for two other metals (tin at $6.64/lb vs. $6.28 and lead at $1.10 vs. 76¢) because of supply issues.

The latest Metals Review by brokerage Natixis Commodity Markets in London says that "the sub-prime credit crisis has both widened and deepened and it is the key factor behind the growing fears of a recession in the U.S." While the economists there don't see a recession, they do see a continued slowdown in the rate of growth of metals-consuming manufacturing. "So, the key factor that has further undermined price levels is that weakness of demand rather than a sudden surge in supply," the report states.

The Natixis analysts believe that "a lot of the weak demand environment is already priced into base metal prices, given the dramatic decline in prices from the recent cyclical highs." And they get no argument on this point from analysts Downham and Williams, who use nickel to prove their point that "predicting nonferrous metals' prices clearly are challenging."

Nickel prices began increasing by an average 24%/year between 2002 and 2005 with the growth accelerating to a 61.5% annual average rate in 2006 and 2007. But, on a monthly basis, London Metal Exchange (LME) spot prices then plunged roughly 50% last December to an average of $11.78/lb (from a high point of $23.65 in May) due to slowing economic growth worldwide and, consequently, softer demand for industrial alloying and plating metals.

Nickel accounts for more than 60% of the cost of making the 300 series of stainless steel, the most widely used and manufactured grade of this specialty steel. During the second half of last year, stainless steel producers balked at high nickel prices and allowed their own inventories to run down or switched production to 200-grade stainless, which uses smaller amounts of nickel. This led to such an increase in commodity exchange stocks that December LME inventories were more than seven times higher than a year earlier—and at their highest levels since late 1999. This caused the decline in spot pricing.

However, with nickel inventories sliding by 2.3% in January, LME prices firmed slightly that month to $12.55/lb and are expected to continue to strengthen somewhat this spring as stainless steel producers restock their supplies of the alloying and plating metal. Cooper says she expects that "prices will remain well above historical norms this year as solid gains in global consumption outstrip increases in production." Still, after averaging $16.87/lb in 2007, she and her forecasting colleagues project that nickel prices will only average $12.82 in 2008—a 25% year-on-year decline.

One reason that nickel prices are likely to remain weak for several months is the fact that the much-heralded recovery in the stainless steel sector has not yet taken off in North America, Europe or anywhere else. "The stainless steel revival has not really kicked in yet," says analyst Vanessa Davidson at industry consultants CRU International in London. In fact, news reports for weeks have been chock full of details about reduced production in China and other Asian markets because of excess inventories. "As a result, nickel demand is subdued at the moment."

Analyst Peter Fish at steel consultancy MEPS (International) in Sheffield, England, says that "uncertainty regarding the economic outlook for 2008 is likely to limit stock building by end users" of nickel, the largest of the alloying and plating group of metals. "Weaker demand for primary nickel from China is forecast for 2008. This coupled with a difficult economic climate in the West (and) new capacity due on-stream later this year, could force prices lower during the final two quarters."

Analyst Jon Bergtheil at J.P. Morgan Securities in London agrees with lower 2008 price projections, saying that "there is an awful lot of nickel in the world." He explains there has been an unexpected new source of supply over the past 18 months in lower-grade nickel pig iron, mostly from China, that has been almost as large as conventional mined and smelted nickel and ferronickel supply.

"This new source of supply has almost single-handedly been responsible for the jump in LME nickel inventories," says Bergtheil. According to industry experts quoted by the Reuters News Service, nickel pig iron production reached to 85,000–90,000 metric tons in 2007 and is expected to rise to 110,000–120,000 metric tons this year. Bergtheil's latest report points out that the production costs for nickel pig iron in blast furnaces averages $10.90/lb so there is still little incentive for these producers to cut back while nickel trades around $12/lb. "There is a large oversupply in nickel pig iron that will take some time to work through, even when demand from stainless steelmakers perks up," agrees analyst Max Leyton at Macquarie Bank in London.

The issues affecting pricing of other alloying and plating metal are almost all supply related since end-user demand isn't going to set any records this year. International Monetary Fund economists now say weakening of manufacturing is becoming evident in the U.S., Canada, Japan, Western Europe and even China. In most cases, it's because of deteriorating consumer confidence; in China, the main reason is weather-related shutdowns of mines, power plants and factories.

According to the metals mavens, there is a pending supply overload for zinc, the nonferrous metal used both to galvanize and otherwise coat sheet steel and as an alloy for copper in making brass. And, while the consensus world price forecast is $1.10/lb for this year, it could drift down to 90¢ because there are more than a half-dozen medium-sized mines gearing up to boost supply by 7.5% in coming months. "There can be little doubt that a large part of the price fall is due to the widespread expectation of substantial supply growth," says Bergtheil, who estimates a 9.6% increase for 2008. Several analyses agree that the expected increase in zinc production and stored inventories could create a price-depressing surplus as high as 310,000 metric tons in 2008, as compared with a 2007 excess supply of just 150,000 metric tons.

The lead price is expected to stay around $1.10/lb this year because of tight supplies of the processed concentrates that are smelted into metal. Atop that, "world supply of refined lead is tight due to China's dominance on the refining side and the fact that export taxes continue to make exports unattractive," writes Bergtheil. In fact, the supply problems are being cited by analysts for the 95% jump in the 2007 annual average price to $1.17 from 60¢. "The problems with the export of lead concentrate from the Magellan mine in Australia merely exacerbated an already tight supply situation and drove the lead price up exponentially," Bergtheil writes. "That exponential price growth, however, had the effect of sponsoring significant new brownfield and greenfield production (in Australia, Bolivia and elsewhere) such that, after adding only 15% to mine supply over the seven years from 2000 to 2007, mine supply looks set to grow by 25% in total over the next three years." And that will keep downward pressure in prices in 2008–2010.

So also will be the fact that LME inventory, which had declined to the critically low level of 0.8 weeks of demand in 2007, should rise to 2.0 weeks in 2008, 2.9 weeks in 2009 and 4.5 weeks in 2010, according to J.P. Morgan estimates.

On the other hand, the Natixis analysis of the supply-demand balance situation for tin suggests the market will remain tight in 2008 with a forecast deficit of 2,000 metric tons—partly because of declined stockpiles caused by a spate of supply outages. That's why the 2008 price forecast has jumped to $6.64 from the previous projection of $6.28 (and up from $6.51 in 2007). Apparent consumption of tin in the U.S. increased an estimated 2% in 2007 but not to coat steel; instead, the best market was as a substitute for such toxic materials as lead in solders. Analysts at Barclays Capital in London generally agree that world steelmakers who make tinplated steel for cans and containers won't boost demand this year for the plating and coating metal.

The big tin issue this year is world supply, suggest these analysts, who point out that China is turning into a net tin importer. That's because China's worst-ever power shortage and severe winter weather causing near-record snowfall have combined to reduce production of tin in several provinces of the world's largest tin producer.

Also, there has been reduced supply from Indonesia because of a government crackdown on illegal mining operations. Earlier forecasts of a 4–5% rebound in world demand are being erased by the slowing business cycle in the U.S. and heightened recession fears globally.