Aluminum and nickel prices to rise, zinc to fall, Daiwa Research says

Aluminum prices will rise significantly in the medium term, with nickel seeing more modest gains, but a supply glut will drive zinc prices lower, according to new research from the Daiwa Institute of Research.

With global power shortages and a surge in power costs reining in the expansion of aluminum smelting capacity, Daiwa forecasts tight supply-demand conditions for aluminum will dominate the landscape until around 2011, when large-scale smelting projects are expected to come on-stream in the Middle East and in India.

“We think a supply shortage of primary aluminum may be in the cards from 2008 through 2010,” Daiwa analysts write in a May research report. “This is due to a likely slowdown in aluminum production owing to global power supply issues.” (Power costs can make up between 30-40% of total aluminum production costs, Daiwa says.)

The LME aluminum cash price will average US$1.34 per lb this year and US$1.48 per lb next year, Daiwa contends, up from its previous forecast of US$1.16 per lb for 2008 and US$1.10 per lb in 2009.

Already this year, aluminum prices are up 16.2% from January.

As for nickel, Daiwa forecasts the supply-demand balance for refined nickel will move from a glut in 2007 of 28,000 metric tonnes, to a shortage this year of 4,000 metric tonnes.

A rebound in stainless steel production in the second half of this year will help drive up prices. LME cash nickel prices will average US$13.33 per lb this year and US$14.50 per lb in 2009. (Daiwa’s prior forecast: US$14.38 per lb for 2008 and US$13.13 per lb for 2009.)

When it comes to zinc, however, oversupply issues will delay a recovery in prices for the metal, Daiwa predicts. It believes zinc production volume will rise 8% year-on-year in 2008, up from a year-on-year jump of 4.8% in 2007.

As a result, Daiwa has lowered its LME zinc cash price forecasts to an average of US$1.08 per lb for this year and 95 per lb next year. Its previous forecasts were US$1.18 per lb. for 2008 and US$1.20 per lb for 2009.

Daiwa expects a supply glut of 38,000 metric tonnes this year and 44,000 metric tonnes next year. (That’s a reversal from last year’s 41,000 metric tonne shortage.)

Daiwa attributes the glut to steady growth in zinc mine production combined with a slowdown in the production of Chinese galvanized steel sheets.

The group anticipates zinc mine production will rise 8% year-on-year in 2008 and 5% year-on-year in 2009.