Copper still the favourite base metal - RBS

While, changes in demand rates will vary across the base metals sector during 2010 and thereafter, the metals with the highest increases in consumption are not necessarily those with the best price outlook

Author: Rhona O'Connell
Posted: Thursday , 31 Dec 2009

LONDON -

The RBS view is that the commodities markets will have a number of headwinds to face in 2010 (Bearish on gold, silver, lead and nickel, but palladium and oil to rise in 2010), but it believes that, of the base metals, copper is the most likely to hit a new record high and that it should therefore be "well ahead of the pack". Although its demand prospects are not the best in the sector, producers may struggle to service demand requirements when the economic cycle is at full momentum. The market is expected to be in deficit again by 2011 and by 2014 -2015 it may again be as tight as it was in the period from 2005-2008. During 2010 it is expected to sustain a surplus and the price may therefore ease before resuming its upward path as deficits develop from 2011 onwards.

The metals expected to show the largest percentage increase in demand in 2010 over 2009 are aluminium and nickel, both increasing their offtake by 10%, but while aluminium is expected to be more or less in balance, nickel stocks are likely to increase by roughly one week's consumption, taking the stocks: consumption ratio to approximately 15 weeks' worth, a heavy overhang and it does not look as if the market will make tangible inroads into this stockpile until 2012 and 2013.

Nickel, despite its large increase in demand, driven by a rebound in austenitic stainless steel (which accounts for some 65% of nickel consumption), is expected to be the weakest base metal in terms of price action during 2010, with the price averaging just 1% more than the level recorded for 2009. The improvement in demand (after a weak period in late 2009) is, not surprisingly, driven particularly by China - although RBS does not expect China's stainless steel mills to be active in the market again until after the Chinese New Year, which in 2010 is the Year of the Tiger, falling on 14th February. Although a number of China's largest stainless producers have had to reduce output in the latter part of 2009, China is in the process of aggressive stainless expansion and the bank expects that by 2013 China will account for 40% of the world's stainless output.

The longer-term prognosis is healthy, as it is for the sector as a whole, but it looks as if nickel will be the last out of the starting blocks next year.

Zinc will be better, although aluminium, lead and copper are still expected to show this metal a clean pair of heels. Zinc prices are expected to register an average this year of some 20% over the average for 2009. Although zinc's proportional surplus will be higher than that of nickel next year, zinc starts from a healthier position with a much smaller stocks: consumption ratio, even though zinc demand in the first half of 2009 was down by 17% against the first half of 2008. Zinc will move towards balance in 2011 and register deficits in the following two years as increases in demand outstrip increases in supply.

The real action comes in lead, copper and aluminium with the first two expected to average 31% more than in 2009 and the latter's annual average to be 32% over that for 2009. RBS expects lead to continue to shine despite its "outstanding" performance over the past twelve months (it is the best performer, year-to-date, among the base metals sector, marginally ahead of copper, with a gain of 32% since the start of 2009) as demand has held up reasonably well during the recession and underlying trends remain firm. Although reported stocks may rise in 2010, they are expected to remain historically low as the supply sector is not especially elastic. Secondary production accounted for 57% of refined supply in 2009 (and is expected to hold the same proportion next year) and this, coupled with the fact that much mine supply is by-product means that the supply-side in this metal will grow at below 4% per annum from now through 2012, compared with consumption growth of over 5% per annum over the same period. This will shift the market from surplus into deficit during 2011.

Aluminium's "spirited run" over the final quarter of the year means that it reached 14-month highs in mid-December, although it has subsequently sustained a small correction. RBS sends a firm "don't be short" message for 2010. Despite the fact that exchange inventories have been registering record highs in late 2009 (equivalent to ten weeks' consumption) and that production is growing apace, notably in China, consumers are expected to re-stock and the bank is looking for growth in demand of more then 8% per annum over the next three years. The risk is premature re-activation of production capacity.

Copper is the favourite metal far the medium term, although conditions are not expected to tighten immediately. RBS has calculated an underlying surplus over the period 2008 - 2009 although it argues that this has been masked by substantial stockpiling in China. The reported stocks: consumption ratio is expected to increase during 2010, but the metal enjoys strong prospects for the medium term and the RBS price forecasts through to 2013 make for exciting reading, outstripping even aluminium, which itself is looking towards a vibrant period over the next few years.

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