MB RESEARCH VIEW – BASE METALS: Pent-up investor demand vs lack of conviction

The market has been expecting volatility in base metal prices. But Metal Bulletin Research has also been viewing the lower levels as buying opportunities.

There is pent-up investor demand on the sidelines and money to be put to work, but there is also a lingering lack of conviction in the market at the moment, resulting in prices remaining directionless overall.

We maintain that, barring any surprises, the upside risks to prices still outweigh the downside risks. But while the market seems focused on the worries surrounding the big-picture themes and is in no mood to look on the bright side, prices will continue to drift.

As long as this cautious attitude remains, we would wait on the sidelines for better, or clearer, buying opportunities – and we are in good company in holding this stance. So, our Q4 2012 price forecasts remain higher than current price levels across the board.

Over the past week, rather than settle down after the uncertainty created by the US election, the focus has shifted to the fiscal cliff and the fear of the worst-case scenario that it could bring.

Some sensible progress on this front could negate this concern and bring a relief rally.

In Europe, though the latest austerity package was passed in Greece – once again averting the threat of an imminent and unpleasant euro exit – it was only by the slimmest of margins. At the same time, the country’s crucial next bailout tranche may be delayed.

Considering the warning signs that Germany is being dragged into recession, Europe continues to provide plenty of ammunition for the bears.

In China, meanwhile, last week marked the start of the leadership handover. But there is not yet any clarity on what this means for further infrastructure spending – or other domestic stimulus – to boost base metal demand. So, overall, the base metals market remains in limbo and with much to worry about.

Aluminium: With the spreads tightening, it looks as though there may be room for a short-covering squeeze, but given the fundamentals it is difficult to get too bullish for aluminium.

Copper: We have updated our supply-demand model this week and now see a small surplus in the global market balance as we move into 2013. This may not undermine support for prices however, as attention is focused on macroeconomic indicators, fiscal troubleshooting and corresponding shifts in investor sentiment.

Softer fundamentals are still likely to dampen copper’s upside potential, especially if new mine projects are successfully ramped up as they may yield larger market surpluses throughout the course of 2013.

Lead: Scrap shortages, tightly held stocks and some large short positions have tightened up the spreads. We do not expect this tightness to lead to significantly higher prices though, as broader issues will cap the upside.

Nickel: The Indonesian export restrictions introduced in May have done little to rein in oversupply in the nickel market as Philippine miners have picked up the baton. In any case, the majority of nickel pig iron capacity closures in China this year have been due to lower prices as opposed to supply squeezes.

Nevertheless, we still consider the high court ruling that is set to overturn the May laws to be a bearish development for nickel prices as it opens the door to the downside – if only because it gives short sellers in this market more confidence. We have lowered our expectations for prices in Q4 2012 this week.

Tin: We have lowered our 2012 deficit forecast to 10,000 tonnes, though our price forecasts remain the same. We believe tightness will persist and the market is likely to trade in deficit or balance in the coming years, depending on Indonesia’s supply performance, which is becoming increasingly difficult to predict with any confidence due to the country’s mining code disarray.

Zinc: The fundamentals are bearish, but availability continues to tighten due to the amount of metal being kept out of the market, either in financing deals or behind long warehouse exit queues.

Zinc is being ringfenced in China too, as it is being used for loan collateral and stockpiled by some provincial governments to support local smelters. There are now rumours that the State Reserve Bureau may build stocks again as well.

While all this activity is supportive of prices and premiums in the short term, what the bloated zinc market really needs are production cuts. However, these will not be forthcoming while the current situation persists.

View full forecasts with technical and fundamental analysis at www.metalbulletinresearch.com/basemetalsoutlook

Andrew Cole, senior base metals analyst, Metal Bulletin Research

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