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Stronger supply to drive surpluses in base metals

London, 17 January 2013

Whilst the outlook for the Chinese economy and domestic metals demand have dominated recent attention on the base metals complex, stronger supply expectations for 2013 are a critical component of projected softer metals market balances according to the latest Barclays Metals Magnifier. Barclays forecasts point to an average 4.3% supply growth level in 2013, versus just 1.2% in 2012, supported by a combination of new projects, expansions and recoveries from disruption last year.

Uncertainties regarding Chinese supply, the evolution of cost pressures and labour contract negotiations all provide risks to their forecast market balances, with a stronger? supply outlook is the driver of softer fundamentals in 2013.

"On the one hand, the improving global economic environment should be bullish for base metals demand and prices. But on the other, the fundamentals for most metals do not support sustained big increases in prices, in our view. Most base metals are in surplus this year, stocks are comfortable and the supply picture is ample, though not without risk," say Barclays.

"This push and pull between macro and micro factors is likely to provide various opportunities throughout the year to trade the ranges in base metals prices. In the short term, should financial market sentiment continue to improve and a ‘risk-on’ environment emerge, base metals prices would likely strengthen further, particularly with the flow of economic data from China getting better. But for many metals, we would view this as an opportunity to sell short, particularly when price action starts to look a bit frothy – as aluminium is already, in our view.

"PGMs have also been driven by supply side news, and the proposed closure of operations by Anglo American Platinum has widened our 2013 deficit for platinum to 256koz and to 609koz for palladium; in turn, only a modest recovery in demand is now needed for prices to retain their upside potential. The key upside risks for gold are skewed towards the near term; thus, should gold fail to respond, the turning point for prices would likely be earlier in 2013. Physical demand in India looks to be soft ahead of further measures anticipated there, but buying in China has been buoyant ahead of the Lunar New Year."

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