The Return To Market Fundamentals?

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An interesting article in Mineweb last week explored the nature of the current base metals market and how contrary to the last few years of relentless rises, some metals have come down substantially over the last 6 months. The article suggests we have a return to fundamentals, meaning supply and demand now drives the markets. Consequently, some metals are still powering ahead like tin, although others have dropped around 50% from their highs, like zinc, lead and nickel. What has changed from just 6-9 months ago that justifies such a dramatic turnaround?

The fundamentals of metals markets are like super tankers — they take a long time to turn around, mostly because changes in supply and demand take months or years to develop. In the case of zinc and lead it has taken the best part of the last 2-3 years for new mines to be financed, developed and brought on stream. In the case of nickel it has taken the substitution of austenitic 300 series grades by lower nickel austenitic 200 series, ferritic and martensitic 400 series over the last 2 years to feed through into decreased nickel demand to bring the price of nickel down. The question is to what extent will other metals follow suite either by increased production or reduced demand?

At some stage the run on tin has got to stall. There is capacity in China and a modest increase in production this year should be enough to ease supply issues. Copper has shown some supply constraints, though strikes at the mines and labor disputes for this year are now largely settled. Furthermore, notwithstanding copper’s position as an investment vehicle, prices should stabilize. Aluminum is in good supply balance with substantial world stocks but as we have said previously, the downside to prices is limited by power costs so the current $2800-3100/ton range is likely where it will remain.

So more stability in prices for this year? I think we would all settle for that. Now what about Iron Ore¦¦?

–Stuart Burns

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