We maintain that, barring any surprises, the upside risks to
prices still outweigh the downside risks. But while the market
seems focused on the worries surrounding the big-picture themes
and is in no mood to look on the bright side, prices will
continue to drift.
As long as this cautious attitude remains, we would wait on the
sidelines for better, or clearer, buying opportunities
– and we are in good company in holding this stance.
So, our Q4 2012 price forecasts remain higher than current
price levels across the board.
Over the past week, rather than settle down after the
uncertainty created by the US election, the focus has shifted
to the fiscal cliff and the fear of the worst-case scenario
that it could bring.
Some sensible progress on this front could negate this concern
and bring a relief rally.
In Europe, though the latest austerity package was passed in
Greece – once again averting the threat of an imminent
and unpleasant euro exit – it was only by the slimmest
of margins. At the same time, the country’s
crucial next bailout tranche may be delayed.
Considering the warning signs that Germany is being dragged
into recession, Europe continues to provide plenty of
ammunition for the bears.
In China, meanwhile, last week marked the start of the
leadership handover. But there is not yet any clarity on what
this means for further infrastructure spending – or
other domestic stimulus – to boost base metal demand.
So, overall, the base metals market remains in limbo and with
much to worry about.
With the spreads tightening, it
looks as though there may be room for a short-covering squeeze,
but given the fundamentals it is difficult to get too bullish
We have updated our supply-demand
model this week and now see a small surplus in the global
market balance as we move into 2013. This may not undermine
support for prices however, as attention is focused on
macroeconomic indicators, fiscal troubleshooting and
corresponding shifts in investor sentiment.
Softer fundamentals are still likely to dampen
copper’s upside potential, especially if new mine
projects are successfully ramped up as they may yield larger
market surpluses throughout the course of 2013.
Scrap shortages, tightly held stocks and
some large short positions have tightened up the spreads. We do
not expect this tightness to lead to significantly higher
prices though, as broader issues will cap the upside.
The Indonesian export restrictions
introduced in May have done little to rein in oversupply in the
nickel market as Philippine miners have picked up the baton. In
any case, the majority of nickel pig iron capacity closures in
China this year have been due to lower prices as opposed to
Nevertheless, we still consider the high court ruling that is
set to overturn the May laws to be a bearish development for
nickel prices as it opens the door to the downside –
if only because it gives short sellers in this market more
confidence. We have lowered our expectations for prices in Q4
2012 this week.
We have lowered our 2012 deficit forecast
to 10,000 tonnes, though our price forecasts remain the same.
We believe tightness will persist and the market is likely to
trade in deficit or balance in the coming years, depending on
Indonesia’s supply performance, which is becoming
increasingly difficult to predict with any confidence due to
the country’s mining code disarray.
The fundamentals are bearish, but
availability continues to tighten due to the amount of metal
being kept out of the market, either in financing deals or
behind long warehouse exit queues.
Zinc is being ringfenced in China too, as it is being used for
loan collateral and stockpiled by some provincial governments
to support local smelters. There are now rumours that the State
Reserve Bureau may build stocks again as well.
While all this activity is supportive of prices and premiums in
the short term, what the bloated zinc market really needs are
production cuts. However, these will not be forthcoming while
the current situation persists.
View full forecasts with technical and fundamental analysis at
Andrew Cole, senior base metals analyst, Metal Bulletin