Metal prices to reflect subdued economic growth

Base Metals Market Update:

Base metals price forecasts lowered to reflect expectations of subdued economic growth.
Aluminium and copper with healthy fundamental outlook and the market awaits China restocking.
Nickel and zinc struggle with oversupply, but prices already at fairly low levels.

New base metal price forecast (USD/tonne)

Source: Nordea Markets

 Old base metal price forecast (USD/tonne)

Source: Nordea Markets

Base metal prices in general normally reflect the current strength in global industrial production, while the forward market provides signals about the industrial production growth outlook. Since the previous issue of Economic Outlook (May) prices initially rose in June-July, before falling sharply in August to new lows for the year. The outlook for a more subdued economic recovery than previously expected has weighed on metal prices recently. The forward market term structure has also moved to price in slower growth in the near term. We lower our metal price forecasts to reflect this less optimistic view on metals demand.

 Aluminium outlook

Global aluminium demand has set new record-highs this year and has in every month since January grown stronger than output. Demand has so far remained resilient during the summer turbulence and should remain strong in the coming years. Growing urbanisation, income and market share in automotive, aerospace, electrical, electronics and solar energy support robust demand growth in the coming years, albeit at a slower pace than previously estimated.  Supply will struggle to keep up in our base scenario, with few expansions to come on stream outside China the next two years. We lower our price forecasts slightly but expect higher average prices over the forecast period.

Copper outlook

Copper output has struggled with declining ore grades and supply disruptions for years. 2012 will, however, see a strong rebound in supply growth. Demand will continue to show steady growth as urbanisation and industrialisation in China and other Emerging Markets continue. We forecast a more balanced market over the next two to three years due to our dampened GDP growth outlook, but copper prices will likely stay high and volatile.

 Nickel outlook

Nickel has been the underperformer among base metals recently on expectations of steady supply additions this year and in 2012. China’s ramp-up of production of nickel pig iron has further reduced import requirements of refined nickel and will continue to do so for a while. A slower economic growth trajectory will also reduce demand, thereby relaxing the market balance further. We lower our price forecasts, but longer-term fundamentals such as the marginal cost of production should support nickel prices at around USD 20,000/tonne.

 Zinc outlook

Zinc still has the weakest fundamentals of the base metals complex. There is expected to be ample supply next year, but we see scope for a structural strengthening of the zinc market towards the end of the forecast period as several large mines could reach the end of their life and be shut.

 See the Metals chapter in Economic Outlook August 2011 published 31 August.

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