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G. Chandrashekhar

Mumbai, Aug. 6 The bull run in the base metals markets that resulted in prices continually spiking in the last three years runs the risk of coming to an end, at least temporarily.

Most base metals, except perhaps aluminium, are vulnerable to a downward correction in prices over the next several months and into the next year as fallout of deteriorating demand, improving supplies and rising inventory levels, all of which are leading to liquidation of long positions on the bourses.

One by one, the factors that supported a bull market are fading. The fact that prices in some cases have fallen sharply (by over 50 per cent) highlights the changing sentiment in investment activity. The latest OECD leading indicators too seconded an economic slowdown in major industrial economies.

Increased fears of stagflation are ultimately bearish for base metals and we are likely to see more fund selling than fund buying over the next eighteen months, asserted London-based Natixis Commodity Markets in its latest review. The expectation is that prices will continue to trend lower.

In addition to robust demand, supply uncertainties played a strong supporting role to prop prices up in recent times. But conditions are changing. Weak demand is likely to combine with accelerated production growth, notwithstanding threat of strike action and power-related problems that can potentially affect output.

Citing the double-digit gains in Chinese refined output so far this year, Natixis said the tightness at the raw material stage appears to be easing, with the exception of copper market. Evidence for deteriorating demand for base metals is provided by downturn in the residential construction sector, which has affected production of products like aluminium extrusions, copper tube and wire.

The downturn in auto sales in the mature economies and the slow spread of the weakness in residential to non-residential construction segment is also affecting aluminium flat-rolled markets, galvanised steel and lead demand. All in all, the demand environment, as the industry enters a seasonal slowdown in offtake in the Northern hemisphere, is not particularly positive, the Natixis review pointed out.

Aluminium prices are forecast to average around $3,000 a tonne in 2008 and 2009, with rising production costs pushing prices higher. Rising inventories would of course cap any rally on the upside. Copper prices are forecast to average $7,250/tonne in 2009, down from 2008 average of $8,250/tonne. Next year, the copper market is expected to move into a large over-supply position at 1.75 lakh tonne, which should drag the average price down.

For 2008, the surplus is estimated at 75,000 tonnes. Nickel prices are forecast to register an annual average of $24,600/tonne in 2008 implying an average of around $22,000/tonne for the remainder of the year. For 2009, the market is projected at $21,000/tonne, which implies that prices may spend some time below $20,000/tonne. Nickel market will be in modest surplus in 2008 and 2009. Zinc prices are forecast at an annual average of $2,100/tonne in 2008 and down to $1,875/tonne for 2009.

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