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US, China seen boosting base metals demand

Keywords: Tags  base metals, Goldman Sachs, aluminum, copper, tin, nickel, zinc, Claire Hack

LONDON — The prospect of a housing recovery in the United States and an encouraging outlook in China will bolster metals demand in 2013, according to Goldman Sachs analysts.

"While the U.S. debt ceiling issues have the potential to create some demand uncertainty over the next couple of months, the outlook for China has improved over the past month," they said in a note Monday. "We continue to believe that during the second half of this year an improving U.S. outlook against an improved emerging market outlook will further boost near-term prices."

However, as metal markets are weaker and only copper is expected to move into backwardation this year, the analysts’ overall commodity outlook remains somewhat more downbeat.

In the longer term, some stability is expected to enter the market, they said. "Driving our expectations for more stable long-term prices has been the improved outlook for long-term energy and metals supply at current price levels—U.S. shale for energy and Chinese productive capacity for metals."

The aluminum market will see its seventh consecutive annual surplus this year, the Goldman Sachs analysts predicted, and relatively low-cost Chinese and Middle East capacity growth is expected to offset any price-related production closures at current prices. The production growth also is expected to outpace marked rises in global aluminum demand, they added.

On the other hand, current aluminum prices and physical premiums are not likely to lead to capacity closures, curtailments or delays that would balance the market over the next six months to a year. "As such, we recommend selling near-dated aluminum at prices above $2,100 per tonne and rolling the position to earn an anticipated sustained contango, as well as any potential price downside," the analysts said.

London Metal Exchange copper was resilient in 2012, largely because of strong growth in late-cycle Chinese construction, they said. "We expect this resilience to continue throughout 2013, with continued strength in Chinese construction completions being complemented by a pick-up in Chinese consumer appliance-related copper consumption."

They also are predicting a slight rebound in non-Chinese activity, and that the improvement in global copper demand growth will offset a forecast acceleration in mine supply growth. This will lead to a broadly balanced market or possibly a small deficit by the middle of 2013, according to the Goldman Sachs analysts, who set their six-month price target at $9,000 per tonne ($4.08 per pound).

Meanwhile, a recent nickel rally to levels above Goldman Sachs’ price targets has led to increasing caution on the price outlook. "At current prices, we foresee ample nickel pig iron supply growth, as well as an overhang of inventory, particularly in China," the analysts said. "Outside of a potential short-term period of stainless steel restocking in Europe and/or the U.S. in (the first quarter) or unanticipated supply disruptions, there appear to be few nickel-specific catalysts for upside from current prices."

Zinc, like aluminum and nickel, has been hurt by large inventories and the possibility of a further small-to-moderate surplus, according to Goldman Sachs.

Chinese supply growth is expected to be enough to counteract a recovery in global zinc demand over the next six months to a year, the analysts said. "Having said this, a major mine is expected to be depleted by March 2013, which could support sentiment towards zinc in the short term and thus we would be wary of being short zinc over this horizon."

A version of this article was first published by AMM sister publication Metal Bulletin.

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