SUCDEN FINANCIAL BASE METALS SEMINAR

London, 14 July 2010 - Sucden Financial has lowered all its 2010 base metal forecasts bar tin following recent corrections across the complex and continued uncertainty in the global economy, it said on Wednesday.

"In the face of the uncertainties about real economic demand, the base metals face differing supply/demand cycles," Sucden said at its latest quarterly base metals seminar here in London. "Copper and tin seems to present the most persuasive fundamentals for demand leading prices higher but other metals present supply-driven bearish risks."

"China’s actions are likely to be a significant influence this year as well as the new factor of inflation fears," FastMarkets analyst William Adams added at the event. "The US economic recovery is gaining momentum but the jury’s out on that."

Copper is set to average $6,600 per tonne this year, Sucden noted, down from its previous estimate of $7,000 due to the choppy trading conditions and price falls of recent weeks.

LME copper was last at $6,690 per tonne, basis three months, having fallen from a near-two-year peak of $8,043.75 in mid-April.

"For the next three months, we can expect a continuation of the current volatile conditions until such a time as market confidence in avoidance of a double-dip recession abates," Sucden said. "We must also take note of the continuing health of the eurozone banking fraternity with its consequent effects on the dollar/euro exchange rate."

But concerns over copper shortages will drastically change attitudes towards the supply/demand balance by the end of the current quarter, thus pushing prices strongly higher, Steve Hardcastle, head of client services at Sucden, said.

"From the end of quarter three and the start of quarter four, attention will switch from consumption to production, with questions of where the 850,000-tonne [rise in consumption] will come from," he noted.

Aluminium will trade at an average of $2,000 per tonne this year, Sucden said, below its prior forecast of $2,250, as the market records a surplus of 3 million tonnes, with production rising 5 million tonnes on last year to 42 million tonnes.

But losses are likely to be contained above $1,800, it added.

Large quantities of metal in LME-bonded warehouses and off-warrant are likely to find their way back onto the market at the right price, Adams said, exacerbating the supply surplus, with more capacity due to come on stream.

But this is likely to remain offset to some extent, at least in the near term, by stocks remaining off-market in finance arrangements.

"There is a lot of metal is locked into financing deals and this is likely to stay there... on top of that we have bottlenecks in North America due to a shortage of trucks and also because of a limit on the amount of metal that the warehouses have to let out per day," Adams said.

"Also, with lower prices we are likely to see more production cuts, especially in China," he added.

Up to 80 percent of surplus metal is held in financing deals, Hardcastle said, also noting "definite demand from the auto industry and the aerospace industry and extrusion industry".

Rising consumption should therefore push prices towards $2,450 per tonne towards the end of the year, he added, with dollar movements and power issues affecting output likely to support prices as well.

LEAD, ZINC, NICKEL ALSO SET FOR LOWER AVERAGES

Sucden expects lead to average $1,850 per tonne, it said, down from the forecast of $1,900 made previously, with a small surplus expected during the current year.

The metal should trade between $1,775 and $1,900 in the current quarter, Sucden noted, before rising in the final quarter as consumption shows signs of improvement.

And the introduction of environmental legislation, combined with rising production costs for secondary supply, could reduce Chinese production.

Zinc will average $1,850 per tonne this year, Sucden said, down marginally from $2,200 previously as severe oversupply - particularly from China - outweighs solid demand from the Chinese automotive and construction industries.

Demand outside China has been strong but that this is not sustainable in the longer-term, Sucden added. Still, zinc is set to trade between $1,700 and $1,995-2,100 during the current three-month period, it noted.

It expects an average nickel price of $19,000 per tonne, a fall of $1,000 from its former forecast of $20,000 due to chronic oversupply, which is set to be exacerbated by a series of large production start-ups.

Consumption from the crucial stainless steel sector - which accounts for some two thirds of total nickel off-take - is also likely to drop.

"The outlook depends on the stainless steel industry, which is slowing and leaves room for a correction," Adams said. "We expect a [demand] slowdown in the second half."

"Production has run ahead of consumption, so a surplus is expected," Hardcastle added.

But prices should remain in the $18,000-20,500 range during the current quarter as falling supply and variations in nickel pig iron production help to offset declining remand.

Bucking the trend of downgrades, however, Sucden raised its 2010 tin outlook to $16,500 from $15,000 previously as the market looks to move into deficit during the current year.

And in the current quarter, a strong rebound in electronics sector demand and supply concerns should see prices range between $17,500 and $19,000 per tonne.

RECOVERING EURO TO UNDERPIN BASE METALS

An improving euro will also push dollar-denominated base metals higher, Sucden noted.

"We can’t overemphasise the influence of the EUR/USD on LME prices," Hardcastle said. "As far as the exchange rate goes, we have seen the bottom around $1.20, and is holding steady now and may move higher. Prices may therefore rise in the second half."

The euro hit a two-month high of $1.2737 in the previous session, steadily recovering from $1.1876, its lowest in more than four years, struck at the start of June.