Analysts wary of base metals after China recovery rally

Experts are cautious while median 2023 price forecasts are lower than both last year’s price and current trading levels

Base metals have enjoyed a strong start to the year, the London Metal Exchange (LME) index rising by 9.4 per cent over the course of January on high hopes for China’s post-COVID reopening.

However, analysts are cautious that China’s recovery may not live up to bullish expectations and that prices have got ahead of themselves, judging by the latest Reuters base metals poll.

Median 2023 price forecasts for all the core LME base metals are lower than both last year’s price and current trading levels.

Depleted exchange inventories are seen limiting the immediate price downside but analysts are also expecting supply to recover from the combination of pandemic disruption and high power prices.

Supply will be a key differentiator next year, with copper, aluminum and tin outperforming nickel, lead and zinc.

Copper is back in favour with investors, who have been building long positions in the metal as one component of the broader China recovery trade.

The LME copper cash settlement price was US$9,075 a tonne on Tuesday, up 10 per cent on the start of January.

Many think it’s already overpriced. The median forecast of 31 analysts is for cash copper to fall back to an average of US$8,250 a tonne in the second quarter before recovering to US$8,750 in the fourth quarter.

A median forecast of US$8,625 for the full year is 2.1 per cent lower than last year’s average of US$8,814 a tonne.

While everyone agrees that China’s reopening is “unequivocally positive for copper,” to quote Capital Economics, many appear to share the research house’s caution around the likely strength of the demand rebound.

The world’s biggest metals consumer still faces problems reinvigorating a moribund property sector and the impact on exports of slower growth in the rest of the world.

“We believe that the early January direction is correct but that the timing is slightly off,” said Saxo Bank, which is expecting improving Chinese demand to kick in only from the second quarter.

China’s recovery momentum and growing “green” demand from solar panels, wind farms and electric vehicles are seen helping copper rise further to US$9,200 a tonne in 2024.

Mitigating against higher prices is an expected lift in mine production which will keep the global market in a 379,000tonne supply surplus over 2023 and 2024.

Indeed, recovering supply is likely to be just as significant to metals pricing as recovering Chinese demand this year.

Only zinc is expected to be in supply deficit this year and that to the modest tune of 19,500 tonnes, according to the median forecast of 12 analysts.

Analysts are expecting the market to swing back to a 123,000-tonne supply surplus in 2024, with the LME average cash price expected to decline to US$3,042 a tonne from US$3,484 in 2022.

Lead is similarly out of favour with analysts, the average LME cash price forecast to slide from US$2,153 a tonne in 2022 to US$2,040 in 2024 under the weight of a cumulative 183,000-tonne surplus this year and next.

Nickel is expected to see an even bigger cumulative surplus of 216,000 tonnes over the same period, reflecting the massive build-out of production capacity in Indonesia.

It’s therefore no surprise that analysts are looking for significantly lower nickel prices, with a median forecast of US$24,000 per tonne this year and US$22,000 in 2024, compared with Tuesday’s cash settlement of US$29,400.

Aluminum is viewed as more finely balanced, with a median forecast supply surplus of 80,535 tonnes this year and 92,100 tonnes in 2024.

These are small numbers in a 60-million-tonne global marketplace, and seem to reflect wariness about the continued impact on smelter production of high power pricing in Europe and sporadic rounds of power rationing in Chinese provinces such as Yunnan.

Although the median forecast is for aluminum to fall to an average US$2,488 a tonne this year, continued productionside constraints will underpin a recovery to US$2,600 next year.

Tin is a good reminder of the challenges of commodities forecasting, the LME tin price having registered both an alltime high of US$51,000 a tonne and a twoyear low of US$17,350 over the course of 2022.

The median forecast is for tin to average US$23,670 a tonne in 2023, a sharp fall from last year’s average price of US$31,362 a tonne. But expectations among the 17 analysts contributing a tin forecast span a wide price spectrum between a high of US$30,959 and a low of US$19,014.

That said, last January’s median forecast proved surprisingly close to the mark at US$34,880 in what was a year of extraordinary volatility.