Commodities------------------------------------------------------...

Commodities

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More Revisions To Bulk And Base Metal Forecasts
FN Arena News - July 26 2007

By Chris Shaw

Upward revisions to commodity price forecasts have been going on for some time now and there are no indications to suggest the trend is drawing to a close given Morgan Stanley, Citi and GSJB Were have this week all lifted some of their estimates and Morgan Stanley in particular remains of the view consensus price forecasts are still too low.

Citi made the most metal specific move in adjusting only its copper price forecasts, but the revisions were significant. The broker has increased its peak price forecast for next year by 40% to US$3.50 per pound, while doubling its previous estimates for both 2009 and 2010 to US$3.00 per pound.

In contrast GSJB Were’s revision is for this year’s copper price, with strike action and the resulting loss of supply enough to offset seasonal weakness and result in the broker increasing its forecast to US$3.35 per pound from US$3.30.

While the broker has not changed its forecast for next year of US$3.48 per pound or in 2009 of US$3.55 per pound its estimates are in line with the Citi view prices are likely to go higher, though its forecasts call for prices to ease in 2010 to US$3.33 per pound.

Morgan Stanley has also lifted its copper estimates to reflect low stockpiles of the metal and the likelihood of further Chinese demand, with its 2007 average price forecast being lifted 5% to US$3.20 per pound, in 2008 by 135 to US$3.40 per pound and in 2009 by 19% to US$3.10 per pound.

Among the other base metals aluminium has enjoyed the largest upgrades thanks to Morgan Stanley taking the view moves by the Chinese government to limit output will eventually be successful. Factor in expected strong demand and the broker feels justified in increasing its long-term price forecast 12% to US$0.95 per pound and 18% and 19% increases to estimates for 2008 and 2009.

In contrast GSJB Were has a more negative short-term view as it expects global surpluses both this year and next year thanks to still strong Chinese exports. Despite this it has lifted its estimates to US$1.18 per pound this year from US$1.12 and by US3c and US4c per pound in 2008 and 2009 to US$0.96 and US$0.98 respectively.

The two brokers have moved in opposite directions in terms of estimates for the nickel price, Were cutting its forecast for this year to US$17.51 per pound from US$18.00 previously, while retaining its 2008 and 2009 estimates of US$12.85 and US$8.15 respectively.

In contrast Morgan Stanley sees prices as continuing to move higher, thanks to strong underlying demand, tight supply and higher capital and operating costs. The broker’s long-term price has been increased 17% to US$7.00 per pound, while next year it anticipates the metal gaining more than 20% to average US$18.75 per pound.

Zinc price expectations are also moving slightly in opposite directions, as while Morgan Stanley expects continued increases in Chinese production to keep the market relatively soft in supply and demand terms it has made minor increases to its estimates at the same time Were has gone the other and cut its forecast this year to US$1.55 per pound from US$1.57 in the expectation the market will finish the year in surplus. The broker’s future year forecasts are unchanged.

In the bulks the broker now expects stronger thermal coal prices, lifting its estimates for JFY09 to US$62 per tonne from US$56.00 to reflect the impact of China moving back into a net importer position and ongoing supply constraints in the Australian market.

This change has flowed through into small increases in PCI and semi-soft metallurgical coal and matches the price forecast of Morgan Stanley. Again the two are at odds over future year expectations though, as Were sees the thermal coal price as coming back to US$55 per tonne in JFY10, whereas Morgan Stanley have it increasing further to US$65 per tonne.

While Were has not adjusted its iron ore forecasts Morgan Stanley has moved its estimates aggressively higher, factoring in a 30% increase in 2008 and a further 5% increase in 2009 before prices flatten out in 2010. This compares to the Were forecast of just a 9% increase in 2008.

The adjustments noted above are from those outside the metals sector looking in, but what does a major player in the industry sees as the outlook for prices in the next year or so?

Merrill Lynch met yesterday with Rio Tinto CEO Tom Albanese and he pointed out (not surprisingly given the billions the company is spending to buy Alcan) the outlook for aluminium appears quite strong given upside for the metal is likely to prove more sustainable thanks to high Chinese costs of production.

Albanese’s other preferred metals for exposure to the China growth story are iron ore and copper, which would suggest the brokers upgrading forecasts this week are on the right track with their revisions and are unlikely to be the last to make such increases, particularly with respect to aluminium.

As UBS notes the aluminium market has lagged the other metals despite a relatively positive outlook, so it suggests if its positive view of the future for aluminium prices is met there is likely to be a turnaround in the current market consensus view, which would generate further upward revisions to estimates.