On the Cusp

Many nonferrous metals may be nearing a turning point. The bounce in pricing experienced by a number of nonferrous metals during the past several months is nearing a potential ceiling. The question a number of handlers are asking is whether sustained demand can strengthen the underlying price and demand for these metals.

In some cases, prices for a number of nonferrous metals have climbed far more than market fundamentals would dictate, resulting in declining prices for the past several months. In the middle of July, many nonferrous metals are showing positive signs, though the summer months are still be a time for inconsistent price movements.

Aluminum markets may be in for a listless few months, despite the fact that supply and demand are in a balance. China appears to be cutting back its new aluminum production because of higher energy costs. Earlier this year, some idled new capacity came back online globally in response to positive signs of an economic recovery. However, toward the middle of the year, significant challenges appear to remain for the economy, which may cap attempted price increases through the summer and perhaps into the early fall.

This new aluminum capacity is now chasing after end markets that have yet to fully rebound from the sharp decline at the end of 2008.

The situation could result in softer pricing for aluminum in the near term. However, if aluminum stocks decline through the summer, higher aluminum prices could be seen by the end of this year. More consultants say they expect to see improvements in end markets by the end of this year. There are currently indications that aluminum demand is creeping up. If this trend continues, a more bullish outlook could come into play.

Supporting this opinion, in its most recent quarterly report, the U.S.-based aluminum producer Alcoa says it is forecasting global aluminum use to increase by 12 percent in 2010, an increase from an earlier forecast of 10 percent.

Alcoa says it is seeing stronger demand from companies involved in packaging, commercial transportation and construction.

Several other reports state that recent economic numbers from this summer show aluminum supplies on hand are shrinking, which could indicate a better scenario for the metal in the second half of the year.

Zinc has been experiencing difficult times through most of this year. Prices have dropped by as much as 30 percent during the first half of this year as a disparity between supply and demand continues to grow. A recent report by the research and investment group Canaccord Genuity echoes the supply/demand imbalance as the biggest concern for zinc markets. Even with demand creeping up, the supply of material has more than made up for this increase.

The bearish sentiment for zinc appears to be universal, as many analysts say they see a strong bias toward the softer side for prices during the next several quarters.

Looking out further, the Canaccord Genuity report says the zinc surplus is expected to continue for the next several years, with the overall oversupply expected to decline through 2012, with a possible deficit by 2013.

Conditions for lead are also difficult presently. China, the largest lead recycler and producer in the world, has shut down nearly 10 percent of its lead recycling capacity, resulting in price decline of approximately 25 percent, as imports of lead to China have dropped by around 85 percent, according to one research report.

Stainless steel markets also have been buffeted by sluggish production figures throughout many parts of the world. China has a significant overcapacity situation and has been reducing its production as it attempts to balance supply and demand.

While China has a reported stainless steel annual capacity of around 15 million tons, the actual output currently is around 9 million tons. According to Stainless Steel Council of China Special Steel Enterprises Association, last year China produced 8.8 million tons of stainless steel, accounting for 35.8 percent of global output.