Base metal markets face a period of transition as quantitative easing in the US gives way to tapering and fundamentals return to play a more prominent role in driving prices, Standard Bank said in its base metals report produced for the 2013 LME dinner.
"As QE in the US gives way to tapering and a slow normalization of monetary policy, real consumption now has to emerge if commodity prices are going to be supported," Standard Bank said in the report.
The bank notes that the "liquidity fueled era" that started in 2009 saw base metals surge to multi-year highs and dislocated the traditional link between fundamentals and prices.
However, the likely tapering of liquidity will see fundamentals return to influence the market.
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"Nevertheless, as tapering takes over, the base metals will have to re-learn how to stand on the basis of their own fundamental strength," the bank said.
It added that China can no longer be relied upon to prop up companies and sectors as the country looks to modernize its economy.
The bank also notes that China has some bad debts and that its overall GDP level remains a real cause for concern.
"It's a brave new world for China as it transitions to a slower and (hopefully) more sustainable growth trajectory," the bank said.
Likewise, the bank said that the LME is also facing "a brave new world" with new ownership and new opportunities as it looks eastward for more influence in Asia. The exchange also faces challenges with its warehousing system.
Standard Bank is no longer bullish on the outlook for the copper market.
"Meanwhile, copper, so long the poster boy of the base metals bull market, will enter a sustained period of oversupply," the bank said.
Standard Bank also said nickel also faces a large supply surplus.
Likewise, aluminium and zinc will also face surpluses out to 2016 until markets tighten again.
"For tin and lead we don't have to wait for the second half of the decade for tightness to arrive -- deficits are already here, and they look like staying for a while," the bank said.
It notes that these are fundamentally the two strongest markets with the greatest potential for price increases.
The bank is forecasting an LME average lead cash price of $2,525/mt in 2014 and $2,650/mt in 2015. It expects tin prices to average $28,000/mt in 2014 and $32,000/mt in 2015.
--Greg Smart, firstname.lastname@example.org
--Edited by Jonathan Loades-Carter, email@example.com