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Base metal prices to rise on new supply-demand fundamentals

The VM Group discusses new supply-demand fundamentals for base metals in its latest Fortis Metals Monthly.

21 Nov 2008, Johannesburg (MineWeb) By Tessa Kruger

The commodity super-cycle theory was thrown off course during the last two months of economic turmoil, leaving the markets to assess supply-demand fundamentals anew, the VM Group said in its Fortis Metals Monthly.

On the demand side, matters appear gloomy as industrial growth seems to be flat or in decline. As a result, the issue is now to balance supply with the new world order of demand, said the Group.

The commodity supply side will be under pressure to shed production, until the full impact of the financial crisis and ensuing global recession on industrial demand is known. If operators delayed making significant cuts to their output and expenditure, significant stock builds that would delay price recovery would occur.

However, numerous mineral projects are now being delayed and mine production cuts imposed across base metals operations. The VM Group estimated that about 630,000t of copper supply per year was currently under threat of outright production cuts, project delays or increasingly complex mining related issues.

About 1.7mt of aluminium production per year has already been lost and similarly 775,000t of zinc per year and 70,000t of lead per year. Huge current and future supply losses of up to 300,000t of nickel per year are expected as miners cut or delay high cost projects and juniors are frozen out by lack of available capital.

The Fortis Group said the industry did have a tendency to overcompensate for lower demand, leading to supply shortfalls well after demand has recovered. New sources of metals were crucial in replacing ageing supply, but the key to funding mining exploration was long-term finance and this capital has run dry.

"We are certain that, in the long-term this will again lead to tight metals markets and tempt prices back to pre-third quarter 2008 levels, especially as China would eventually resume its progress to rapid industrial development," it said.

Long-term outlook

The report said that in the short-term production cuts would continue and this would help to set a price floor. However, that floor would only be stable as long as demand didn't collapse any further.

Fortis said no one really knew how severe the coming recession would be, but recent data suggested it would be "worse rather than better than expectations".

In some cases this could mean double-digit slumps in demand for metals such as aluminium, copper, nickel and zinc, while production cuts to date appeared to lag well behind this.

The VM Group therefore sees inventories continuing to build, dampening price recovery ahead. However, it said stocks, apart from aluminium and nickel, were still at relatively low levels historically and any "appreciable" return to 2007 demand levels would quickly see them depleted.

"In addition, the delay or suspension of mineral exploration projects, crucial to support industrial demand in the long-term, will lead to tightness ahead."

The report said this would be a defining factor in the upswing of metals prices from 2010, as the VM Group felt confident that China and other leading developing economies would quickly recover and grow to pre-recession levels.

By this time, if investors were still interested, prices could move higher quite rapidly.

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