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Base Metals — oversupply concerns loom over nickel, zinc

Base metals have delivered a strong price performance so far this year, but the outlook on copper, nickel and zinc may go separate ways, according to speakers at the 121 Mining Investment in Hong Kong on Oct. 18.

Helen Lau, metals & mining research analyst at Argonaut Securities, told delegates that drivers of copper demand will come from the electronics and auto industries, as China is rebalancing itself toward a more consumption-driven economy.

"We expect to see more policies to support urban consumption [in China]," Lau said, noting that demand from transportation construction, home appliances and electronics will see a boost.

Meanwhile, a potential downside for copper supply will continue to weigh on the market, Lau said, referring to consistent declines in average copper grades as well as limited CapEx flowing into new projects in the past years.

Felix Lam, head of Energy & Materials Research at CCB International, agreed that the market is fundamentally favorable for copper prices but warned that planned interest rate hikes in the U.S. and China's deleveraging campaign would be downside risks on the price outlook.

As for nickel, Daniel Meng, head of China Materials at CLSA, believes that the sector is through the worst but was not yet ready for a rebound.

"It is quite near the bottom area and I think financial returns for long-term investors who invest in good-quality nickel will outperform other metals," Meng said.

Lau was more bearish on the metal, pointing to oversupply risks that may emerge as early as 2018.

"China is closing down [nickel pig iron] plants but supply from Indonesia and the Philippines is continuing to increase," Lau said.

Lau believes that the zinc market is also facing pressure of new supply.

"If Glencore Plc decided to restart their Australian mines, the price would pull back," Lau said, adding that MMG Ltd. is also fast-tracking the Dugald River zinc project in Queensland, Australia, whereas Zijin Mining Group Co. Ltd. is trying to expand zinc operations in Russia.

A certain degree of supply discipline is necessary for the sector, CCB International's Lam said.