London, 21 July 2010

Reuters has published its biannual base metals poll, a chance to take the collective pulse of the global analyst community. As ever the poll captures a wide divergence of views straddling the bull-bear spectrum but if it's possible to talk about a consensus view, it comes in the form of the median price forecast for each of the major LME metals.

And this time around the median price forecasts are hardly brimming with bullish enthusiasm for the industrial metals complex, at least for the rest of this year. Rather, they capture the growing concern about the sustainability of the global recovery.

Prices May Have Alread Peaked

Comparing the current median price forecasts with the last poll in January largely tells us what we already know, as analysts have factored first-half price performance into their full-year average forecasts.

LME metals endured a wretched price performance in the second quarter of this year. But some fared decidedly better than others, as shown in the next two graphics. No surprise then that the median forecasts for lead and zinc have been lowered since the January poll to reflect the "ugly sisters'" underperformance within an underperforming pack.

Equally unsurprisingly, those for nickel and tin have been raised, reflecting these two metals' relative outperformance in the first half of the year. The median aluminium forecast is unchanged at $2,094 per tonne, basis LME cash (the same basis for all the forecasts).

Analysts are no keener on the light metal now than they were in January, largely because the market is still expected to be in major oversupply. Indeed, the median assessment of that surplus has crept up to 1.20 million tonnes from 1.05 million tonnes at the start of the year. The median forecast for copper has been shaved by a marginal 2.8 percent since January.

More interesting is to compare the latest median forecasts with actual average price performance in the first half of this year. On this basis only tin comes out as a clear winner. The median forecast is now $17,548 per tonne, up both 7.7 percent on the January poll and up 0.3 percent on the actual average in the first six months of 2010. Underlying that bull view is a shift of median view about market balance from 2,000-tonne surplus in January to 7,500-tonne deficit now.

The median forecast for every other metal for 2010 as a whole is below the actual average price in the first six months. The "consensus view" among analysts seems to be that while industrial metals prices will pick up from their current summer-doldrums levels, this year's highs may already be passed.

A case in point is nickel, which along with tin was the star performer in the first part of the year. The median average forecast is now $20,225 per tonne in calendar 2010, down 4.7 percent from an average of $21,213 per tonne in H1 2010.

That's despite a median view that the nickel market is going to record a 32,000-tonne deficit this year. Back in January the median expectation was for a 15,000-tonne surplus. But reduced expectations for prices in the second half of the year tally with a growing consensus that the stainless steel sector, so important to nickel usage, will not match its first-half strength in the coming six months.

Downside Risks Accumulate

Perhaps the most interesting shift of opinions, though, relates to copper. The median forecast is now for the red metal to average $6,878 per tonne this year, compared with an actual average of $7,130 in the first half. Not that there's been any deterioration in analysts' view of copper's underlying dynamics. Quite the opposite in fact!

The median forecast is for copper to record a supplydemand surplus of 41,000 tonnes, lower than the 115,000-tonne surplus expected in January. In other words analysts have become more bullish about copper's fundamentals but less bullish about the price outlook in the second half of 2010.

This seems to capture well the overall downbeat view of the next six months, in keeping with copper's bellwether status.

What is bothering analysts? Few yet view a double-dip global recession as anything more than an outlier in the range of possible macroeconomic outcomes. But the headwinds created by the tail of the economic storm are still multiple.

Nic Brown, analyst at Natixis, summed up well what is furrowing the collective analytic brow: "For our baseline scenario, we remain optimistic on the outlook for base metals, but our lower price forecasts are a reflection of the significant downside risks posed by: Risk of European sovereign default, and/or impact of excessive fiscal austerity; Risk of US double-dip; Risk of Chinese economy slowing by more than intended; Potential impact on raw material demand from Chinese push toward greater energy efficiency and shift to higher value-added output."

That's a lot of risk! And Brown's list helps explain the current disconnect between copper's positive micro dynamics and its laboured price performance. After all, LME copper stocks are still falling, China is still importing huge amounts of metal by any historical yardstick and the red metal's supply-side remains as problematic as ever. Yet the price is struggling to hold its own around $6,600 per tonne level.

Barclays Capital described this micro-macro price dynamic in its latest research report thus: "The interaction of weak sentiment and strong data has produced counterintuitive outcomes in some markets. The more demand has speeded up, the more prices have reflected fears that it will slow down."

Researchers at the bank, which continues to favour copper among the LME metals, go on to suggest that "the main storm has certainly passed, but it has left in its wake some potential for periods of unsettled weather. After two years of often volcanic price change and economic turbulence, there might not be an instant re-adjustment to the notion that normality can be hard graft and occasionally slow going in specific markets."

Today's Reuters base metals poll amounts to a resounding "Hear! Hear!" to that statement.

Ends --

By Andy Home, Reuters Columnist - for Commodities Now.

The opinions expressed are his own.