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Global metals market on slow recovery path

G. Chandrashekhar

MUMBAI, Nov. 30

COMMODITY markets, especially metals, are teetering on the edge of recovery with leading indicators pointing to a slower pace, experts said.

Leading indicators of growth that had been pointing to a strong upturn, levelled out in mid-year, and have levelled off in recent months, and in absolute terms, have declined slightly.

"The indicators are still pointing to growth, but certainly a slower recovery than previously,'' said Mr Adam Rowley, Division Director and metals analyst with Macquarie Research Metals and Mining.

Sentiment suggests very poor demand, but base metals and bulk commodities have enjoyed a recovery this year. However, the recovery has been insufficient to outweigh supply and expectations have been lowered, according to the latest Commodities Forecaster Report released by the company.

With China continuing to provide the strongest growth, the Chinese metals demand is growing at a rapid pace. The research report sees China as a major factor on demand for metals. The extent to which this could be felt on the western markets depends on China's ability to supply its growth needs internally, the analyst said.

China will be a bullish factor for copper, nickel, zinc and tin; but massive production growth means it will be bearish for aluminium.

Overall, sentiment in the metals markets is, perhaps not surprisingly, generally bearish. Disappointment over the pace of recovery and concern about the sustainability of the recovery into 2003 are weighing on prices.

"However, unless global growth takes a turn for the worse, we would expect metals demand growth to pick up further in 2003, and in markets where supply growth is limited, we envisage deficits emerging,'' the report forecast.

Aluminium: The rapid pace of supply growth will remain the main problem for the aluminium market over the next few years. Demand has actually picked up this year, but not nearly enough to bring the market back into balance. Without producer action (of which there is little sign) the aluminium market is heading for a prolonged period of large market surpluses.

Copper: Despite only a modest recovery in demand, the copper market has moved back towards balance due to lower refined production and extremely strong Chinese imports. A significant improvement in prices over the next year may be expected as demand recovers and the market moves into deficit.

Nickel: The nickel market appears likely to become very tight in 2003 and 2004— as long as Russian sales remain under control. Nickel demand has turned up impressively in 2002 (the strongest of all the base metals), and although growth is expected to slow in 2003, the lack of nickel capacity additions is expected to leave the market in deficit over the next two years.

Zinc: Hopes of a turnaround in the zinc market continue to be pushed back, with lacklustre demand and announcements of mine restarts restricting the upside potential. With demand expected to pick up in 2003, the zinc market is expected to move back into balance, but mine production increases will prevent the market moving into deficit. Any price improvement is likely to be disappointingly slow.

Lead: The weakness of demand has left lead prices under pressure despite an increasingly bullish supply picture. Mine production has fallen sharply in 2002 and is expected to be fairly flat in 2003, leaving the concentrates market extremely tight. It is believed that demand has passed its lowest point and stronger growth in 2003 will swing the market into deficit lifting prices back above $500 a tonne.

Tin: The tin market keeps trying to rally but until now the fundamentals have not been sufficiently strong to support the moves. The market does appear to have moved back into balance in 2002 with lower Chinese exports more than offsetting higher western world production. Lack of concentrates is seen impacting production and global output is expected to be virtually unchanged in 2003. As demand recovers, the tin market will swing into a significant deficit in 2003.

Steel: Global steel production continues to exceed expectations, driven almost entirely by China. Global steel demand is expected to continue to grow strongly in 2003 as demand picks up in the other main consuming regions.

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