Base metals supply overestimated, Octagon says

Thu Dec 4, 2008 2:48pm EST

TORONTO, Dec 4 (Reuters) - Forecasters may be overestimating the global supply of base metals, particularly zinc, Octagon Research said on Thursday, suggesting that hard-hit metal prices may rebound sooner than expected.

Analyst Hendrik Visagie said in a note that the market has been too focused on concerns about falling demand, and has been ignoring a supply side that is becoming much leaner as low prices and tight credit markets have forced producers to shut mines and delay new projects.

"We can count 800,000 tonnes to 1 million tonnes of zinc supply to come off the market for next year. That's 8 to 9 percent of the world's mine supply not there," he told Reuters.

"The point is that supply is dropping much faster than any realistic long-term demand forecast."

In the past, miners might stockpile metal and keep a mine running during a low-price environment, until prices rebound. But the freeze-up of credit markets has made this impossible, forcing mines to instead suspend operations.

Brazil's Vale (VALE5.SA: Quote, Profile, Research, Stock Buzz) became the latest producer to announce such measures on Thursday, saying it would close indefinitely its Copper Cliff South mine in Ontario, and will suspend its Voisey's Bay nickel and copper mine in Newfoundland and Labrador for one month.

Zinc, copper, and nickel prices have fallen 52 percent, 51 percent, and 65 percent so far this year, while large inventories of unsold metal have prompted many to predict more declines.

But Visagie said production cutbacks have yet to hit prices, noting that it can take up to four months for ore pulled out of a mine to end up as shipped metal. This means mines closed in October may not affect end-users until February.

As well, he believes the market has overestimated the drop in demand.

Visagie expects the strongest rebound from zinc, and is also bullish on copper and lead, as well as nickel to a lesser degree. (Reporting by Cameron French; editing by Rob Wilson)