Fitch Ratings weighs in with base metal forecasts

For the next two years, spending on mining exploration and expansion projects will remain on average below peak levels reached in 2008, according to analysts at Fitch Ratings in a Dec. 22 special report on global mining and metals.

That’s because the construction, automotive, and capital goods sectors — the keys to the consumption of base metals — remain “weak in most industrialized regions,” the New York-based ratings agency asserted.

Aluminum and zinc will continue to be dogged by oversupply and any upside for nickel will be limited by swing production, the report notes.

World stocks of aluminum “are building to record levels as 2009 is the third-consecutive year of production surpluses,” while zinc surpluses remain huge despite production cuts of 4% in the first ten months of the year.

As for nickel, about 20% of nickel mine capacity has been “idled.” Fitch believes there will be swing supply from nickel in pig iron when nickel prices exceed US$8 per lb. and declining nickel in pig production when prices fall below US$6 per lb.

Copper has the best fundamentals of the bunch with “continued consumption growth” in China, a gradual recovery in industrialized nations, and limited supply (copper stocks are at about average levels globally “and are not expected to build materially”).

China accounted for about 35% of the global copper market in the year to Aug. 31, and its economy “should show growth driven by the building of power-generation facilities and the upgrading of urban infrastructure,” the report stated.

Fitch analysts also believe the prospects for copper are better than other base metals because they expect sales of light vehicles in the United States to increase 7.8% in 2010 over 2009. (Automotive original equipment manufacturers make up about 40% of copper demand in the U.S. and the US makes up about 11% of the global copper market.)

And while Fitch expects additional copper production in 2010 of more than 1 million tonnes, supply growth will remain limited and “has generally disappointed on the order of 3%-5% annually.”