Make note of the final paragraph. Very good news for ZINC.
Many experts have begun to suggest metal prices have risen to levels beyond those supported by fundamentals, but in the view of National Australia Bank these speculative pressures remain and prices may yet go higher.
At the same time as speculative demand has strengthened, the supply picture has not altered drastically given the long lead-time in getting new projects up and running, leading the bank to forecast a 29% increase in its Base Metal Price Index this year.
While this suggests the bullish environment is intact, the bank notes much of the rise will be early in the year and prices will decline as supply increases, the bank forecasting a 9.4% fall in its index in 2007.
Supply increases are forecast to continue into 2007, though in the bank’s view metal prices will remain at what are high levels by historical standards as the supply response continues to be impacted by higher costs of inputs such as machinery, raw materials and labour.
As has been the case for the past couple of years China remains the key for metal prices given its strong demand, but the bank notes improved conditions in Europe and Japan should see these markets become increasingly important to the global demand picture.
Looking across the metals spectrum, on the bank’s estimates only nickel and copper are likely to record a surplus this year, meaning the low stockpiles of other metals such as zinc will keep markets tight.
As a result, the bank suggests prices will continue to be susceptible to any fluctuations in supply whether from industrial action by workers, weather or mechanical issues. The other major risk is from a position reversal by the speculative players in the markets, the bank noting there remains the risk of a correction in the copper market that would have a flow-on impact across all the base metals.
Assessing the copper market, the bank sees downside potential coming from an increase in supply and a reversal of the market’s backwardation of late last year. Offsetting this is the potential for supply disruptions, leading the bank to forecast a 24% increase in the copper price to an average of US$4595/tonne in 2006.
In aluminium, the bank notes the initiatives of the Chinese government to limit production growth are finally having some impact, as are ongoing problems with electricity supply to smelters. The bank suggests the market will remain in deficit this year, allowing the aluminium price to record an average of US$2425/tonne, up 28% on 2005.
While speculators helped drive the lead price higher last year and early this year, the bank suggests prices will ease in coming months but remain above last year’s levels as supply growth will produce only a modest deficit. It is forecasting an average price of US$1100/tonne, up 14%.
Nickel is a similar story, with speculators having pushed prices higher late last year, but the bank expects supply increases will see a gradual decline in prices over the course of 2006, resulting in a forecast average of US$14,189/tonne, down 3.6% on 2005.
Diminishing stockpiles and an even slower rate of supply response leads the bank to suggest the fundamentals for zinc are the most favourable of the metals, especially as on its estimates demand will exceed supply by possibly more than 500,000 tonnes this year. As a result, the bank is forecasting the zinc price to increase by 67% this year to US$2,336/tonne.
This article was kindly brought to you by Australasian Investment Review.
AUL Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
