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A truck is loaded with rocks at an Equinox copper mine in Lumwana, Zambia. Zambian government officials have long maintained copper producers in the country have not been paying their share of taxes. (© Ho New/Reuters)
A truck is loaded with rocks at an Equinox copper mine in Lumwana, Zambia. Zambian government officials have long maintained copper producers in the country have not been paying their share of taxes. (© Ho New/Reuters)

Outlook

The three base metals investors should increase exposure to in 2013 Add to ...

Tin, lead and copper may be the top-performing base metals in 2013 and aluminum the worst, analysts suggest.

Most look for the complex as a whole to be roughly sideways or modestly higher, with much hinging on how much the global economy and thus demand for industrial metals improves.

“The two that we like most next year are lead and tin,” said Edward Meir, commodities consultant with INTL FCStone. “They have the tightest supply/demand profile. They have the lowest amount in inventory as a percentage of overall consumption.”

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Robin Bhar, metals analyst with Société Générale, said his firm is looking for another year of subpar global economic growth of around 2.7 per cent.

“We think that will lead to a fairly constrained demand environment,” he said. “So we would want to be positioned in those metals that are more supply-constrained with tighter supply/demand balances. So the three metals we think will do well would be copper, tin and lead.”

Barclays Capital said tin is the only base metal for which it anticipates a supply deficit in 2013. “We are also positive on lead,” Barclays said. Morgan Stanley, meanwhile, listed copper as its top pick among the base metals. CPM Group is upbeat on lead, although it looks for copper to fare well in the first half of the year.

Supply Deficit Forecast For Tin

Mr. Bhar described the fundamental backdrop as perhaps most bullish for tin.

“There is literally no new supply coming through and there won’t be for a while,” Mr. Bhar said. “It remains in a structural deficit, so we think the price can move higher and outperform. We’re seeing signs of that already.”

In particular, tin is often held hostage by supply-related issues – such as weather or government policies – in Indonesia, the world’s largest exporter of the metal, analysts said.

INTL FCStone, CPM Group, Barclays and SoGen all forecast tin to be in supply deficits in 2013. FCStone, Barclays and SoGen look for global stocks on average to amount to between no more than 2.1 and 2.9 weeks of global consumption during 2013, while CPM Group lists a negative 0.7.

“An extremely limited appetite for financing in the sector at current price levels at least, exacerbated by a lack of liquidity in the LME forward curve, means that project development is simply not occurring at anywhere near the pace needed to support a rebound in supply growth to pull the market sustainably out of deficit,” Barclays said. “While we expect a modest improvement in existing production in China and Indonesia in 2013, largely due to the incentive offered by higher prices, this will only mildly reduce the market deficit.”

Lead Market Seen Tightening

CPM Group looks for the strongest gain in average annual prices to come in lead. “The market is moving, in our opinion, into a deficit in 2013, which is going to help support prices,” said Catherine Virga, director of research.

Morgan Stanley said it anticipates the first supply deficit in three years, with this continuing out to 2016. The firm said it looks for stronger demand to carry over into 2013, including auto batteries in the U.S. and China. “Primary supply growth should be limited by a rising number of lead/zinc mine closures in the next two years,” Morgan Stanley said.

Others look for a supply surplus, but a small one. INTL FCStone estimated the market will be in a 50,000-metric-ton surplus, down from an expected 70,000 in 2012.

The market is presently in a surplus, although “not in chronic oversupply,” INTL FCStone said. “It’s ending stocks ratio, which measures the number of weeks of consumption, is still very, very low.”

CPM Group, So Gen, Barclays and FCStone collectively look for inventories during 2013 to amount to somewhere between 2 and 3.3 weeks of world consumption.

Lead is “a very difficult metal to produce,” Mr. Meir said. Some of this is due to increasing regulations and environmental controls. “It’s going to be a problem on the supply side producing more lead.”

Mr. Bhar cited low supply from scrap metal. “The demand side is relatively immune to the business cycle because of the replacement-battery sector,” he added.

Most Look For Copper To Flip To Supply Surplus, But Small One

Global supplies of copper are expected to rise during 2013 as a number of expansions and new projects come on line. Still, while many analysts are calling for this market to shift from a deficit in recent years to a surplus, any oversupply is expected to be small.

“We think copper stays pretty balanced,” Mr. Bhar said. “We are forecasting admittedly a small surplus. But that depends on the mines performing to plan, and they haven’t for some time.”

Morgan Stanley favours copper among the base metals. “Despite a spate of supply growth, global copper inventory remains well below average and coupled with decent demand, the supply/demand balance will remain tight,” said Morgan Stanley.

Any growth in global supplies is coming from a “low base,” with the average stocks-to-use ratio below average, Morgan Stanley said. Meanwhile, the firm called itself “increasingly positive” on demand, especially from China.

Ms. Virga looks for copper to be stronger during the early part of the year, but anticipates a fall-off in the second half as mine supply picks up.

Most analysts look for global copper inventories in 2013 to amount to between 2 and 3.7 weeks of consumption.

Aluminum Supplies More Abundant Than Most Base Metals

Barclays, SoGen, FCStone and CPM Group look for the ratio of global inventories to consumption in aluminum to be roughly two to three times higher than for tin, lead and copper. Their collective range is 8.5 to 10.3 weeks.

“Aluminum is our least favourite (base metal) because of the inventory overhang and the fact the Chinese have not yet cut production,” Mr. Meir said.

Morgan Stanley rated aluminum last of the 21 commodities it gave a ranking. “Although prices remain poor, output continues to grow and the primary market is not rebalancing,” Morgan Stanley said.

Analysts pointed out that China actually increased production despite lower prices for much of 2012. The Chinese government has provided power subsidies that helped aluminum smelters avoid losses, and there are even reports that the subsidies led to some aluminum capacity being restarted. The Chinese government is more willing to keep industries running and workers employed than idling inefficient capacity based on margin pressures, FCStone said.

“We suspect that this policy will continue well into 2013, which is why we suspect Chinese output will grow again next year, but perhaps not as much as the previous two years,” FCStone said.

While global supplies are high, one factor that kept the metal from tumbling more are high premiums with much metal is tied up in warehouses, much of it due to financing arrangements, analysts said. These high premiums have prevented the expected closure of high-cost, aging capacity despite cumulative inventory surpluses of 10.3 million tons over the past six years and cash prices trading well below marginal cost, Morgan Stanley said.

While supplies are high, Mr. Bhar commented that demand is also growing due to increasing use of lightweight materials in automobiles and packaging. “Yes, the supply side is also growing strongly. But the excess supplies have been locked away in financing deals that are prevalent in the ali market. Ali can move higher as well.”

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