Metals Commentary: Daiwa Research sets price bottom for mid-2009

A new report from Japan’s Daiwa Institute of Research forecasts that looser monetary policy next year in China will help stimulate a recovery in investment and metal demand there, while a bottom to the economic downturn in industrialized economies will be followed by a mild recovery from 2010 onwards.

If all of those scenarios come to pass, Daiwa analysts suggest we will likely see a floor for non-ferrous metal prices, with the exception of aluminum, in the middle of 2009.

In a report forecasting prices for copper, aluminum, zinc and nickel, the research group anticipates copper prices will continue to fall this year but will reach a bottom in the middle of next year.

With falling production in Chile, Daiwa anticipates an improvement in copper supply and demand during 2010. The institute is forecasting an average London Metals Exchange cash price for copper of US$3.41 per lb. this year and US$2.76 per lb. in 2009. Those numbers are down significantly from its former forecasts of US$3.70 per lb. for 2008 and US$3.83 per lb. in 2009.

Aluminum, however, is “unlikely” to recover in 2010 because the metal is experiencing the “most severe” supply glut of all non-ferrous metals. Supply and demand fundamentals may improve in 2011 but until then, Daiwa forecasts “weak price trends over the near term.”

For this year, Daiwa predicts an average LME cash price for aluminum of US$1.22 per lb. and US93 per lb. in 2009, compared with earlier forecasts of US$1.34 per lb. and US$1.48 per lb., respectively. “Prices have been trending downward since hitting a high of US$1.48 per lb. in July 2008,” the report states. “The looming supply glut should continue to drive down prices through 2009.

As for zinc, Daiwa is calling for a slow rise in prices from 2009 “after prices bottom at current levels.” Thanks to zinc producers in China cutting back production, Daiwa says it does not expect zinc prices to fall below current levels.

Of all the metals covered in the report, Daiwa expects nickel to hit bottom first, followed by zinc, copper and aluminum. At presstime, nickel prices had fallen 30% in the last 10 days alone and 60% since the beginning of the year. The metal recently traded at a spot price of US$4.88 per lb., down from about US$9.50 per lb. in August and US$24 per lb. last summer.

“The price has been trending downward since hitting recent highs in early March, but we think that the pullback ran its course in August-September,” the report maintains. “The price should rebound steadily as supply/demand conditions improve in 2008.” Daiwa has downgraded its average LME nickel cash price outlook from US$13.33 per lb. to US$10.24 per lb. this year and from US$14.50 per lb. to US$8.50 per lb. in 2009.

Daiwa expects demand for stainless steel will likely bottom in the remaining months of this year. (Stainless steel consumes about 60% of refined nickel production.)