1. Updated Base Metals Price Forecast
Slower start to 2012 before prices regain traction
Commodities Research, 7 December 2011
Bombed out aluminium prices to prevail for a while longer before supply cuts improve balance
Copper prices expected to average above USD 8,000/tonne amid continued supply deficit
Nickel market continues to struggle with oversupply, but supply risks remain to the downside
Table 1. New base metals price forecast to levels around USD 2,000-2,100 per tonne (Chart
USD/tonne 2011E 2012E 2013E 1). In the current market, aluminium producers are
Aluminium 2,400 2,375 2,500 feeling the pinch from poor prices and rising costs,
Copper 8,850 8,250 8,500
which paves the way for production cuts. Accord-
Nickel 22,800 20,000 21,000
Source: Nordea Markets
ing to industry consultants Harbor Intelligence and
Brook Hunt, marginal 1 cash output costs in the
aluminium industry are currently estimated between
Table 2. Old forecast (31 August 2011)
USD/tonne 2011E 2012E 2013E
USD 2,400-2,500 per tonne. Average cash costs are
Aluminium 2,460 2,500 2,600 estimated at around USD 1,950 per tonne for 2011.
Copper 9,200 8,500 8,500 China, the largest producer and consumer of alu-
Nickel 23,600 21,000 21,000 minium, is among the highest cost producers with
Source: Nordea Markets average cash costs currently standing at USD 2,670
per tonne according to Harbor Intelligence. Domes-
Our updated economic forecasts for global GDP tic aluminium prices in China are also significantly
growth of 3.2% (from 3.3%) in 2012E and 3.7% higher than LME prices, but roughly 40% of the
(from 3.8%) in 2013E entail a mild recession in the industry is losing money on a cash cost basis, nev-
Euro area but with limited spill-over effects to the ertheless.
global economy, which will grow slightly below
trend next year. Our forecast for Chinese GDP Chart 1. Aluminium prices and exchange
growth is left unchanged at 8.5% and 8.1% for inventories
2012E and 2013E, respectively. The first half of 6 Primary aluminium 3,500
mn tonnes USD/tonne
2012 is expected to be slightly weaker than antici-
5
pated in September and our base metals price fore- 3,000
casts have been adjusted to reflect both this sub- 4
dued growth outlook and supply-side developments 2,500
since then (see tables 1 and 2 above). 3
2,000
2
Aluminium prices to rebound from
1,500
depressed levels 1
The slowdown in economic growth this year has
0 1,000
resulted in a worsening of expected fundamentals in Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11
the aluminium sector through lower expected future LME inventories SHFE inventories LME Cash price (rhs)
economic and thus aluminium demand growth. The Source: Bloomberg, Nordea Markets
price of aluminium at the London Metals Exchange
has tumbled 24% from its recent peak in April 2011
1
Marginal cash costs are defined as the cash costs of
producers at the 90th percentile on the supply curve.
1

2. balanced aluminium market for the next couple of
years, with risks to the outlook largely balanced.
Robust demand growth to be driven by China Current aluminium prices are considered too low
Global end user aluminium demand has stalled, but compared to current operating costs and to our ex-
demand for primary aluminium has remained firm. pectations for the global operating rate, which
The exception is in Europe where physical premi- should remain in the 85-87% range. Prices are
ums have started to come down from elevated lev- therefore expected to average higher than current
els. We have lowered our aluminium demand forward prices over the next two years. We pencil
growth forecast for 2012E to 5.7% (7.7%) but leave in average prices of USD 2,375 (USD 2,500) per
our 2013E growth forecast unchanged at 6.5%. The tonne and USD 2,500 (USD 2,600) per tonne for
decent demand outlook is underpinned by robust 2012E and 2013E, respectively.
demand growth from China of around 10-11%.
Demand is expected to be boosted by aluminium Chart 2. Aluminium forecast versus market
price competitiveness and penetration in the trans- USD/tonne LME Primary Aluminium probability range
Based on implied volatilities in the options market
5,000
portation sector. Growing urbanisation, income and
4,500
market share in automotive, aerospace, electrical,
4,000
electronics and solar energy support robust demand 3,500
growth in the coming years, albeit at a slower pace 3,000
2,500
than previously estimated. 2,500
2,375
2,000
Supply under pressure by poor profitability 1,500
1,000
Global aluminium output has come under intense
500
pressure from poor prices and sticky production
0
costs. However, historically high physical premi- Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13
ums paid on top of LME prices provide some offset 90% Confidence 95% Confidence LME price
Forward market Nordea Forecast
for producers. Output fell to a 6-month low in Oc- Source: Bloomberg, Nordea Markets
tober according to official figures from the Interna-
tional Aluminium Institute (IAI) as production in Copper prices to reflect continued deficit
China decreased sharply. The pipeline for capacity Copper prices peaked in early February this year at
expansions outside China looks relatively dry and is prices above USD 10,000 per tonne as the funda-
heavily dependent on expansions in India where mental outlook pointed to an increasing supply
output has disappointed already. Chinese planned deficit. However, lack of seasonal restocking by
expansions are decent, but could be hurt by poor Chinese buyers during the spring, who instead
profitability and power-related constraints amid turned to drawing on inventories amid historically
China’s recurring power shortages. According to high prices, tight credit conditions and a closed “ar-
China Electricity Council, the current power short- bitrage window” to import LME based copper, re-
age could last until next spring, but may be allevi- sulted in prices trending lower. Meanwhile, global
ated by the recently announced hike in power prices economic growth slowed, reducing actual and ex-
and cap on coal prices from January. This neverthe- pected copper demand from China and the rest of
less puts upwards pressure on Chinese production the world. LME copper prices tumbled 33% from
costs by an estimated USD 60 per tonne for smelt- the February peak to the recent low in early Octo-
ers without self-generated power. Although current ber (USD 6,785 per tonne), but currently trade
prices incentivise production cuts, especially in around USD 7,800-7,900 per tonne (Chart 3).
China, we expect that prices must remain at current
depressed levels for a while before we see cuts. The industry marginal (90th percentile) cash cost is
Shutting down and restarting production is costly, estimated by consultants Brook Hunt at USD 4,000
high premiums provide offset, costs can come per tonne while the most expensive mine operations
down further and history has shown that prices require almost USD 8,000 per tonne. Prices above
must trade at current levels on the cost curve (50th this “threshold” should therefore only be justified in
percentile) for a sustained period before cuts are a market characterised by deficit, ie refined supply
made. falling short of refined usage resulting in stock
draws. According to the latest data from the Inter-
Bottom line: Capacity is expected to expand at a national Copper Study Group (ICSG), the market
slightly higher pace than demand next year, with was in a production deficit of 161k tonnes (1%) for
the opposite being true for 2013E. We see a largely
2

3. the first eight months of 2011 versus a deficit of per consumption as the power and construction sec-
339k tonnes for the same period of 2010. World tors constitute more than half of total consumption.
demand grew by 1% during this period, while mine We expect Chinese consumption to grow at around
production continued to underperform relative to 7% p.a. the coming two years and expect consump-
capacity with production during the first eight tion per capita to reach levels above those of Eu-
months of 2011 practically unchanged from last rope and North America as early as 2013E. Histori-
year. Production at three of the four largest produc- cally, world real GDP growth of 1% corresponds to
ers (Chile, Peru and the United States) fell by an copper consumption growth of 1.2% (see Nordic
aggregated 4% despite record high copper prices Metals & Mining, 5 October 2011, Nordea Equity
(Chart 4). Research). We expect demand to converge to this
historical relationship after a break-out on the up-
Chart 3. Copper prices and exchange in- side in 2010 and to the downside in 2011E, imply-
ventories ing around 4% y/y global demand growth in both
900
Copper
11,000 2012E and 2013E.
'000 tonnes USD/tonne
800 10,000
700 9,000 Supply expansions look comfortable in theory
600 8,000 Repeated labour strikes, adverse weather condi-
500 7,000
tions, operational problems and lower ore head
400 6,000
grades have become the norm rather than the ex-
300 5,000
ception for copper supply in recent years. 2011 has
200 4,000
been no exception to this “rule” and the ISCG ex-
pects a production deficit of about 200k tonnes for
100 3,000
2011. The project pipeline looks, on paper, rela-
0 2,000
Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 tively comfortable, with expansions at existing
LME inventories SHFE inventories mines (brownfield) and new plants (greenfield)
Comex inventories LME Cash price (rhs)
Source: Bloomberg, Nordea Markets
planned to come on stream the coming few years.
Copper mine production is highly concentrated
Chart 4. Chilean copper ore and concen- given that Americas (mainly Chile, Peru and the
US) and Asia constitute roughly 75% of global out-
trates production continues to disappoint
put. Of the 10 largest copper mines in the world, six
6.5
Chile Copper ore and concentrates production
are Chilean. Judging by production plans for the
6.0
Chilean mines alone, they would manage to meet
mn tonnes, annualised
the expected demand increase by themselves. How-
5.5
ever, copper output tends to fall short of guidance
levels and we expect history to repeat itself.
5.0
Bottom line: ICSG expects an increase in refined
4.5 copper production of 3.4% in 2012E compared to
the producers’ expansion plans of roughly 9%
4.0 growth (1.5m tonnes). We share the view of the
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
ICSG and expect a production deficit to emerge
5y range 2011 2010 5 year avg also in 2012E for a third year in a row. We expect a
Source: Bloomberg, World Bureau of Metals Statistics, Nordea Mar- nearly balanced market in 2013E. Due to a slightly
kets
weaker economic development in the start of 2012,
we have lowered our average price forecast for
Demand to pick up from low 2011-levels
2012E from USD 8,500 per tonne to USD 8,250 per
World copper refined usage is expected to grow by
tonne, but keep our forecast for 2013E at USD
1.5-2% y/y this year after 2010’s strong 7.1% y/y
8,500 per tonne.
growth. China will continue to be the driver of de-
mand growth in the coming years as urbanisation
and industrialisation continue. China will have to
import roughly one-fourth of its copper needs,
meaning that Chinese stocking cycles will remain a
key price driver for the foreseeable future. We also
expect China’s current 5-year plan to support cop-
3

4. Chart 5. Copper forecast versus market Slower demand growth in 2012E, but stronger
USD/tonne LME Copper probability range
Based on implied volatilities in the options market
2013E
20,000
Slower economic growth and industrial production
18,000
in the first half of 2012 than previously forecast
16,000
14,000
will most likely result in lower nickel demand
12,000
growth next year. INSG’s late September forecast
10,000
8,250 8,500
of 6% demand growth for both 2011E and 2012E is
8,000 considered too optimistic, in our view. We factor in
6,000 demand growth of around 5% this year, falling to
4,000
3% next year before climbing to around 9% in
2,000
2013E.
0
Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13
90% Confidence
Forward market
95% Confidence
Nordea Forecast
LME price Chart 6. Nickel prices and exchange inven-
Source: Bloomberg, Nordea Markets tories
180 Nickel
35,000
'000 tonnes USD/tonne
Nickel prices threatened by supply glut 160
30,000
Nickel has been the underperformer among base 140
25,000
metals this year on expectations of steady supply 120
additions this year and in 2012. Nickel prices 100 20,000
peaked in February above USD 29,000 per tonne, 80 15,000
but currently trades around USD 18,000 per tonne 60
(Chart 6). As stainless steel production accounts for 10,000
40
roughly two-thirds of global nickel consumption, 5,000
20
the slowdown in stainless steel production in the
0 0
second half of the year has put pressure on refined Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11
nickel demand. At the same time, China’s nickel LME inventories LME Cash price (rhs)
pig iron (NPI) industry, an alternative nickel feed- Source: Bloomberg, Nordea Markets
stock for stainless steel production, churned out
record-high amounts. Chinese net imports of re- Supply pipeline impressive on paper
fined nickel have therefore remained low this year, On paper, the expected nickel supply pipeline looks
while imports of nickel ore and concentrates to feed overwhelming, but disruptions and delays have
the NPI production have skyrocketed. Recently, been a constant feature for the industry. Production
however, these producers are getting squeezed out growth is partly dependent on highly complex pro-
of the market as nickel prices have fallen below the jects, which makes delays likely, in our view. The
cost of NPI production, which is estimated by con- International Nickel Study Group (INSG) latest es-
sultants Brook Hunt in the range of USD 19,000- timates point to a supply increase of around 9% in
20,000 per tonne. Moreover, 90% of global nickel 2012E, which is roughly in line with our own esti-
supply operates cash positively at price levels mates. However, this figure does not include any
around USD 15,000 per tonne. general adjustment factor for possible disruptions,
implying that risks to supply are skewed to the
Despite the sluggish price development, record- downside.
high refined nickel production in September and
NPI ramp-up in China, visible exchange inventories Bottom line: Coupled with our demand expecta-
of refined nickel have declined steadily by a total of tion, the strong supply pipeline translates into an
33% since the start of the year (Chart 6). We expect expected supply surplus the coming two years. We
that some of the excess material has been shipped therefore expect prices to continue to be determined
into China and may be stored away in off-market by the costs of the marginal producers. Further-
bonded warehouses. Nevertheless, LME nickel more, we pencil in a slightly lower price assump-
stocks will begin 2012 at the lowest starting level in tion for 2012E of USD 20,000 per tonne (USD
three years. 21,000 per tonne) due to weaker demand expecta-
tions for the start of the year. We nevertheless keep
our previous forecast of USD 21,000 per tonne for
2013E.
4

5. Chart 7. Nickel forecast versus market and business and consumer confidence has eroded,
USD/tonne LME Nickel probability range
Based on implied volatilities in the options market
which could pave the way for an upside surprise to
economic growth. There is also probably pent-up
50,000
metals demand for instance in the United States
40,000 where construction activity remains at depressed
levels. Stronger monetary and fiscal policy easing
30,000
by China would most likely boost metals demand
20,000
20,000 21,000
growth from the world’s largest consumer. How-
ever, implementation of substantial easing meas-
10,000 ures is most likely to be reactive rather than pre-
emptive, in our view, if growth should falter more
0
Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13 than currently anticipated.
90% Confidence 95% Confidence LME price
Forward market Nordea Forecast
Source: Bloomberg, Nordea Markets
Risks to our outlook Bjørnar Tonhaugen
Forecasting metals prices in the current environ- bjornar.tonhaugen@nordea.com +47 2248 7959
ment is very difficult as the macroeconomic uncer-
tainty is perceived to be heightened. Industrial met-
als demand is highly cyclical and sensitive to
changes in economic growth prospects. The sensi-
tivity of demand to GDP growth is highest for
nickel and aluminium, and lowest for copper. Nev-
ertheless, small changes to the economic outlook
could have relatively large implications for ex-
pected metals demand and thereby the expected
market balance. Our forecast described above must
therefore be viewed as our “best estimate” corre-
sponding to our baseline forecasts for global eco-
nomic growth.
The largest downside risks to our outlook are pre-
dominantly demand-side related. The debt crisis in
the Euro-zone, if not properly contained, may have
large spill-over effects to the global economy
mainly through the financial sector. A so-called
“hard landing” in the Chinese economy, for exam-
ple instigated by a burst of the property and credit
“bubble” is another known risk. Chinese residential
floor space for sale has mushroomed lately as prop-
erty demand has fallen markedly. Anecdotal evi-
dence points to a liquidity crunch among property
developers. If property prices fall sharply, private
construction may be cut back and China’s demand
for raw materials and industrial metals will drop
substantially.
Upside risks to our outlook include stronger eco-
nomic growth than envisaged. Expectations are low
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