Forecasters put Copper up and zinc down for 2008

In their report on copper and zinc prices, Scotia Capital analysts Onno Rutten and Lawrence Smith upped their copper price forecast by 35% to US$3.25 per lb. but turned bearish on zinc.

More ominously the two analysts warn that the base metal complex could be at risk if the global ecomomy continues to trend downward on the heels of the U.S. credit crisis.

While warning that such a turn could take copper down as collateral, they still believe there is evidence of continued strength in 2008 for the red metal.

The key to copper’s strength in the coming year, according to the report, will be Chinese demand. The indicators point to hoarding of copper in the massive country, and the situation has made for tight supplies despite the U.S. economic slowdown and less demand from Europe.

Chinese consumption or refined copper is up 40% year-to-date a situation that makes for a surplus of just 150,000 tonnes in 2008 not enough to protect prices from any supply disruptions.

Also influencing strong prices are speculative interest fuelled by a weak greenback, declining interest rates and persistent inflation concerns.

The fact that copper prices have stayed high since the Federal Reserve cut rates to deal with the sub-prime crisis boosted Rutten and Smiths confidence that index and hedge funds were providing strong support to copper prices.

But the reliance on China comes with a caveat.

The copper market is primarily supported by Chinese demand strength, as there is no Western world demand strength for any of the base metals at the moment hence, copper should currently be seen as a One Trick Pony, they write.

While it may not be the most assuring tag, it has a more gentle ring than the slogan chosen for the state of zinc. Rutten and Smith have labeled the four lettered mineral the whipping boy.

The key culprit behind the tag is the ramp-up of several new mines. A 400,000 tonne surplus is being forecasted for 2008, leading them to knock down their price forecast by 8% to US$1.10 from US$1.20 for 2008.

Apex Silvers (SIL-N) San Cristobal in Bolivia, Peruvian- miner Milpos Cerro Lindo, Teck Cominco (TCK.A-T, TCK.B-T, TCK-N) and Xstratas (XSRAF-O, XTA-L) Lennard Shelf, along with a ramp-up at their massive Antamina where they are teamed with BHP Billiton (BHP-N, BLT-L) — are all feeding into the zinc surplus.

As for the Chinese influence, while the report says zinc mining in the country has been sluggish, Chinese smelters will have more than adequate feed supply available to continue to ramp-up zinc production thanks to sharply improved Western World concentrate availability and rising concentrate imports to China, they write.

The report also names nickel and aluminum as being in a surplus situation.

When combined with the macro economy being hit by the credit crisis, Rutten and Smith say there is a real risk that the entire LME complex could weaken.

And if the credit crisis manages to spiral itself into a recession in the U.S., Rutten and Smith believe the LME complex would be hit even harder.

In such a high-risk setting, Rutten and Smith pick First Quantum (FM-T, FQM-L), Lundin Mining (LUN-T, LMC-N, LUMI-O) and Thompson Creek (TCM-T) as their Sector Outperforms largely due to the expectation that earnings for those companies will come in above consensus.