BASE METALS

Base metals likely to win out over medium term - Natixis

While over the short term there are logical reasons for a continued rise in both precious and base metals prices, one of the markets is likely subsequently to be disappointed

GRONINGEN - 

In the short term, both precious and base metals are likely to go up but, both markets can't continue to rise in unison. This is the view expressed in Natixis's Fourth Quarter Metals review.

The group points out that "On the one hand, investors are still seeking a safe haven store of value to protect themselves from potential currency debasement as the US, UK and Japanese central banks all contemplate a resumption of unorthodox monetary policies and, as the Brazilian finance minister Guido Mantega pointed out, the world is facing 'an international trade war' as countries attempt to benefit from currency depreciation. On the other hand, the rebound in economic growth among those developed economies that suffered the most from the recent economic crisis, alongside continued strong growth among a number of rapidly developing countries, is underpinning a rapid improvement in supply and demand fundamentals across the base metals complex."

Natixis believes that while in the short term the logic for the appreciation of both precious and base metals is sound, over the medium term, one of these markets is bound to be disappointed.

Generally speaking, the bank is leaning toward the base metals camp because it says continued economic growth is likely to be supportive of base metals prices but, it cautions, " while a gradual return to economic normality will eventually undermine precious metal markets, It may, be some time before this denouement plays out, and in the meantime there remain substantial obstacles to be overcome before the world economy can return to anything like normality."

The bank points out that, base metal prices have rebounded strongly from the very low levels experienced in 2009 and, although it expects the pace of demand growth in developed economies to slow in 2011, growth from emerging economies should remain firm.

In particular, Natixis believes it important to remember that, while Chinese growth should stabilise above 8%, it is not the only developing country to be going through a period of "metals intensive growth". Country's like Turkey Egypt  and a number of Asian economies like Indonesia and Malaysia are also experiencing strong growth.

But, while the group is broadly positive about base metals, there is a definite hierarchy emerging as to which metals are likely to do better if the global economy starts to get back to its feet.

Tin is the favoured of the base metals as the group believes the fundamentals are the most bullish. "On the demand side, there has been a strong recovery in the global electronics sector that is expected to be maintained. More important is the tin industry's seeming inability to respond to the higher demand levels."

For 2011, the group expects, - a market deficit of around 20,000 tonnes next year, which should support an average price of $24,500/tonne.

Copper too has the gaze of the bank, despite having rallied significantly from lows hit during summer. " Although we view the sharp rebound of demand in the mature economies as a "one-off" response to the depressed conditions in 2009, strong consumption growth next year from developing countries will support robust global growth. Capacity constraints will continue to limit the likely supply response, at least until 2013 when a number of major new mines are likely to come on stream."

The group is forecasting an average price for next year of $8,300/tonne which, it says "implies that prices could easily approach $9,000/tonne during the latter part of the year."

While zinc's performance in the early part of 2010 didn't amaze Natixis saysthe metal's fundamentals are improving on the back of increased demand and slightly limited supply growth. The bank expects the metal to average $2,450/tonne in 2011.

In the middle of the table, lead and nickel are expected to move marginally higher with the bank expecting average annual prices of $2,400/tonne and $24,000/tonne respectively in 2011.

Finally, aluminium brings up the rear, weighed down by massive stock overhangs. The bank says, "the market will return to a small deficit position in 2011, but high inventories at exchange warehouses should continue to put a cap on rallies. Nevertheless, general buoyancy elsewhere in the sector should allow prices to average $2,400/tonne next year.

While the group is decidedly on the base metals team, it does warn that, "If the rally in gold prices is truly reflective of the desperate measures central banks are prepared to take in order to sustain economic growth in the face of an imminent double-dip recession, then the recent rally in base metal prices may prove to be unsustainable.

It adds, "For base metals, there is the clear risk that demand growth may slow... If base metal demand growth starts to slow, it is unlikely that there will be an immediate supply response given that prices remain well in excess of the marginal costs of production. Demand has posted sharp gains so far this year, which reflects a cyclical rebound in the mature economies and continued growth within the developing economies. Demand in the former could slow markedly in 2011 if the withdrawal of fiscal stimulus impacts more negatively on the world economy than we expect.