Brighter prospects for metals in 1997.

Base metals have had a bad run over the last couple of years with high surplus supplies pushing prices down and a sluggish global economy doing little to help. The future however, looks far brighter although copper could remain tarnished.

It's been a bearish year for base metals producers with the fall in metal prices providing a reliable barometer of the global economy and reflecting a sluggish industrial output in Europe and Japan.

Despite a fairly robust growth in the US, which accounts for 20% to 25% of the world's metal consumption, two additional factors have helped depress the price of metals: Continued destocking since early 1995, especially in aluminium; and speculative short-selling by major hedge funds in the aftermath of the June Sumitomo debacle, the world's largest copper trader. In essence, the metal sector now looks technically "over-sold" and a downward trend in most metals should bottom-out.

However, the forecast for next year is brighter. An upturn in the world economy, especially in the commodity-intensive emerging markets, and an end to the current phase of destocking makes most industry experts optimistic about 1997. RTZ-CRA, the world's largest mining group, estimates a rising trend for metals and industrial minerals over the next 18 months. Good global growth is projected at 4%, up from 3.5% in 1996. Apart from copper, declining stock levels indicate that market conditions should tighten over the next 12 months and thereby underpin prices.

The impact of rising demand will vary among metals. More stringent physical markets are expected for zinc, aluminium, lead and possibly nickel, as inventories approach lower levels. To contrast, the outlook for copper the world's most heavily traded metal and one of Africa's major metals that provides a significant source of export earnings - remains bearish.

The copper market is going through a phase of a structural change and is entering an era of large supply-surpluses, revealed by current low prices. Bloomsbury Minerals Economics projects a global surplus of 175,000 tonnes in 1996, rising to 250,000 tonnes the following year. Other sources estimate a surplus for 1997 between 300,000 to 557,000 tonnes due to a major expansion in mine and refining capacity. In the medium term, copper's end-of-year stock consumption ratio is expected to remain above the normal level of one month which could well also undermine prices. Projections for prices over the next 15 months range between $1,900 to $1,600 per tonne.

Analysts say that the prevailing sentiment may lead to further producers and fund selling. There are concerns that the market will have to absorb either large quantities of Chinese copper or large tonnages of unreported stocks held by Sumitomo. The likely impact if this does occur, is a substantial stocks surplus.

Nickel prices have been hit this year by poor physical off-take and higher levels of production, which is a result of an increase in effective capacity in 1995 with new mills on stream in South Africa and Asia. Stainless steel output accounts for two-thirds of nickel consumption and is forecast to increase by only 1% compared to a growth level of 13% in 1994 and 1995. Europe's recent slow-down in growth made a major inventory adjustment inevitable. Indeed global nickel consumption is expected to fall by 3% to reach 875,000 tonnes, with total supplies rising by 5% to over 860,000 tonnes.

The nickel market has been in supply-deficit since 1994 and end-of-year-stock levels are reported to have dropped from 4.4 months of annual consumption in 1993 to 2.3 months in 1995. The physical market may turn slightly bullish next year, when stainless steel destocking should be drawing to an end. Prices are projected to rise to $8,600 per tonne, from this year's average of $7,820.

Aluminium has traded heavily under copper's shadow because large hedge funds, which began short-selling the latter in May and June, were also holding positions in aluminium. They have now reduced their holdings in order to protect themselves against the effects of a spill-over from copper.

Although cash prices were damaged this year by consumer destocking, surplus stocks and a surge of Russian exports, they are now improving. Signs show that the destocking process is slowly coming to an end and demand in the West is projected to rise by 5% to 18.19m tonnes in 1997. The market is balanced more tightly now, with a supply-deficit of 32,000 tonnes forecast for 1997 compared to this year's surplus of 182,000 tonnes. The expected supply-deficit and reduction in total stocks has seen analysts estimate more supportive prices for 1997: RTZ-CRA forecasts an average of $1,700 per tonne.

According to the International Primary Aluminium Institute, Africa's total output is expected to increase to over 1m tonnes once South Africa's new Hillside smelter begins to achieve its full output capacity of 466,000 tonnes per year. Africa's capacity could be over 2.17m tonnes per year if all the existing and proposed smelters in Mozambique, Nigeria, Cameroon and Egypt were fully operational. However, prices will need to be well above average production costs of $1,253 per tonne, to justify an increase in capacity. Industry experts suggest that $1,655 to $1,855 would warrant investment in more smelting capacity.

Finally, the outlook for zinc and lead also appears bullish. Demand for Zinc's should recover in the major consuming countries. The market should gain a further boost from the fall in Chinese exports plus a drop in stocks to critically low levels. Lead is also looking firmer this year, with stocks falling below the critical five-week consumption level, and a healthy demand from battery makers. Statistics suggest supply-tightness will continue into 1997 with prices averaging in excess of $800 per tonne.