LONDON The traditional summer slowdown in the base metals market has been absent in recent years, largely because demand remained robust and supply fell short of requirements due to industrial unrest and other factors. This year is likely to be different, however, with lower prices expected for both copper and nickel.
Typically, the onset of summer sees industrial activity in the northern hemisphere slacken as consumers go on vacation and metals demand slows from the more-active second quarter. In the past this would have meant falling metal prices, but tight supplies in recent years resulted in rising prices. In the case of copper and nickel, prices remained much firmer than expected because of supply concerns. What about this summer? Will copper and nickel prices move lower? We believe lower prices this summer remain a strong possibility.
Copper prices fell sharply at the beginning of this year on concerns about slowing global growth and specifically fears of a sharp U.S. slowdown because of the woes of the housing sector, which is a key sector for copper consumption. However, prices bottomed out in early February at slightly more than $5,200 per tonne and rallied steadily thereafter towards a recent peak of around $8,250 on falling London Metal Exchange stocks, Chinese buying ahead of the peak demand season during the second quarter and as the U.S. housing market appeared to be past its worst. The impressive price rally was bolstered by short covering by speculators/funds, with more than half of the outstanding net short position on the Commodity Exchange now covered.
The strong increase in refined copper imports by China has prompted concerns that the physical market is now in oversupply, and with imports of scrap also at high levels this has raised fears of very weak refined imports during the rest of the year. Although this may not necessarily be the case, we believe that it will be used as an excuse by the funds to push prices lower—perhaps as low as $5,000 per tonne—only to then buy back and drive prices higher again.
Nickel is another metal which we expect to fall. It's hard to trade the front end outright as we believe that it's far too risky to buy or sell. In fact, we recommend taking profits on long positions as prices are too high and a correction is long overdue; prices in the range of $30,000 to $40,000 per tonne would make nickel attractive to buy again.
There is mounting evidence that high prices are leading to demand destruction, with stainless steel producers shifting to a product mix containing less or no nickel, and many were expected to make production cuts. In addition, stainless steel scrap availability has increased and China is importing low-grade laterite ore to process into pig iron, a ferronickel material containing between 2 and 4 percent nickel. This displaced 30,000 tonnes of refined nickel demand in China in 2006 and is likely to displace another 60,000 to 80,000 tonnes this year. A steady rise in heavily depleted LME nickel stocks should confirm our bearish view on nickel prices.
For both copper and nickel we expect to see prices falling during the slow summer period, but this is likely to be only temporary, with a rebound likely as metals demand picks up on the back of an increase in industrial activity associated with the fourth quarter. Overall, supply and demand fundamentals remain strong, stocks are still low and both metals should begin to look attractive again following a correction.
Robin Bhar is a base metals strategist at UBS AG, London.