Base Metals Prices at Risk from Chinese Import Slowdowns

RENO, July 10 -- Although industrial metals posted strong gains during the second quarter of this year, Deutsche Bank strategists warned base metals are at risk from the slowdown in China's "seemingly insatiable appetite for imports is diminishing."

    In their recently published Commodities Quarterly, Deutsche Bank strategists Joel Crane and Xiao Fu warned, "Coupled with the onset of a period of seasonal slowdown, we believe the momentum apparent in Q2 will stall and move into reverse during the second half of this year."

    "Heading into 2010, we believe the metals complex will be hindered by a slow recovery in the industrialized economies and as it searches for a recovery in Chinese GDP growth which we expect to take hold from the second quarter of next year," they added.

    "Combined with our expectations of slower Chinese growth in the first three quarters of 2010, we do not expect industrial metals prices to top the peaks achieve in O2 2009 until Q4 2010."

    Nevertheless, the strategists were more upbeat for long term industrial metals prices. "From 2011 we have a more positive longer-term outlook. A lack of investment and capital expenditure in the resource sector post the credit crunch combined with strong demand from emerging market countries makes for a strong structural story."

    Copper

    The Deutsche Bank strategists estimated that China currently has between 700kt-1Mt of excess copper stocks. "We think Chinese imports will decline in Q3 and ease pressure on the market balance."

    "While we are forecasting a 3.9% drop in global [copper] consumption this year, China's early fiscal stimulus injection helped ensure the key end-use sectors remain buoyant in the first half of 2009 and contributes to our expectations of an 8% yoy rise in Chinese copper consumption. However, next year we are forecasting a lower Chinese growth rate in 2010 (6%) as a result of an easing in the stimulus process."

    Nonetheless, Deutsche declared, "Copper remains our favored exposure in the LME complex. Despite our forecasts of easing prices through Q2 2010, its longer-term fundamentals look the strongest."

    Nickel

    Like copper, the strategists believe "nickel possesses one of the most encouraging outlooks in the LME complex."

    "For starters, the global nickel market surplus, which has been evident since March 2008, is falling rapidly as a result of the 18-month campaign from producers to cut output in response to the collapse in global demand," they said. "Furthermore, after six quarters of negative demand growth, we think the global stainless steel market has adequately destocked and is primed to enter a restocking period, in our view."

    "We believe the producer response to the demand shock has been adequate and the global nickel market surplus is rapidly declining," the strategists advised. "Nevertheless throughout the rest of this quarter and into the summer, we expect nickel prices will ease in concert with the other industrial metals."

    Zinc

    "While we think the zinc market is set to continue to tighten into 2010. We believe the coming quarter will deliver lower prices," the strategists forecast. "We believe this will occur due to weaker Chinese demand and given seasonal weakness in OECD economies."

    "We are forecasting a 240Kt surplus in 2009 followed by a 250Kt deficit in 2010 as demand ramps up against concentrate supply constraints."

    Aluminum

    Like the rest of the industrial metals complex, Deutsche Bank suggests much of the fate of aluminum rests with China. "We are concerned over the level of oversupply in the Chinese market," the strategists said. "Furthermore, oversupply is only being exacerbated by domestic capacity restarts."

    "Despite a rebound in the key Chinese industrial demand indicators, we believe supply will outweigh consumption in the second half of the year and into 2010," they predicted.

    Deutsche Bank is also forecasting a 1.75Mt aluminum surplus in 2009 followed by a smaller but still substantial 620Kt surplus in 2010.

    Lead

    "Given the relatively poor fundamental outlook, we believe lead has moved in concert with copper, bolstered by record high Chinese import demand, strong equity markets and dollar weakness,
 the strategists said.

    "We have revised our 2009 global demand forecast down from 8.29Mt to 8.20Mt to reflect the ongoing weakness in the world auto industry as well as flowing import demand from China."

    Deutsche Bank also lowered its 2009 global lead supply estimates from 8.64Mt to 8.4Mt, but raised its 2009 and 2010 price forecasts for lead by US$1,415/t and $1,356t. "On a fundamental basis, we expect lead price rally to slow into Q3 and we are forecasting prices to decline in the coming years as demand for lead-acid batteries declines."

    Tin

    Although LME inventory levels have quadrupled over the past six months, hitting the highest level over three years, Deutsche Bank cautioned "any significant upward movement may be limited by continued stock increase."

    "We remain positive for long run outlook for tin, as few new projects are planned for the next three years meaning China will be increasingly dependent on tin imports," Crane and Xiao concluded.

    (Source: mineweb)