LME Week consensus is a bright future but short-term pain: Andy Home

LONDON, Oct 18 (Reuters) - Copper is the metal with the most upside price potential next year, according to those attending last week's London Metal Exchange (LME) seminar.

The informal poll of 800 people gathered for the flagship event of LME Week in London was decisive with 53% opting for copper over its base metal peers.

It helped that Max Layton of Citi had just pronounced copper to be "THE bullish energy transition trade within commodities" in the accompanying analysts debate.

Tin came a distant second with 23% of the vote after Jeremy Pearce of the International Tin Association explained tin's unsung role as the solder that binds the world's circuit boards.

No surprise that neither aluminium nor nickel excited the audience. HARBOR Aluminum's Jorge Vazquez warned that the light metal is facing a huge supply surplus of two million tonnes over the next two years, while Macquarie consultant Jim Lennon talked about Indonesia's massive production surge swamping the nickel market.

Perhaps more telling than anything, however, is that even Citi expects copper prices to fall over the next few months.

The future may be bright and electric but copper and the rest of the LME metals are currently caught in an old-fashioned industrial downturn.

WESTERN DEMAND HIT

The European manufacturing sector is in recession due to high energy costs and U.S. growth is slowing.

The cyclical downturn has changed the short-term outlook for many base metals with the International Copper Study Group (ICSG) and the International Lead and Zinc Study Group (ILZSG) significantly revising estimated supply-demand balances at their October meetings.

When the ICSG's statistical committee last met in April, it was expecting a global refined copper supply deficit of 114,000 metric tons in 2023 before a shift to a 267,000-metric ton surplus in 2024.

It has just cut this year's forecast shortfall to a marginal 27,000 metric tons, while next year's surplus has ballooned out to 467,000 metric tons.

Weak Western demand is a key part of that revised calculation. In April the Group expected usage growth of 1.6% outside of China this year, but it now thinks usage will fall by 1.0%, reflecting declines in both Europe and North America.

It's a similar story with the ILZSG revisions. European zinc demand is expected to fall by 1.8% this year, dragging global usage growth down to 1.1% from the 2.1% rate forecast in April.

The 45,000-metric ton zinc supply shortfall expected at the last meeting has turned into a big 248,000-metric ton surplus, followed by an even larger 367,000 surplus next year.

The International Nickel Study Group went against the trend by raising its demand forecasts for both years on the back of recovery in the stainless steel sector and the continuing battery boom.

But nickel production is rising so fast in Indonesia the Group still thinks the global market will register two years of supply surplus to the collective tune of a massive 462,000 metric tons.

GREEN CHINA

The Groups' latest forecasts would be more bearish still were it not for strong apparent usage in China.

China has surprised to the upside this year. The country's metals production is booming and it is importing more aluminium and zinc. Refined copper imports are still running below last year's levels but have been robust over the last two reported months.

Since everyone uses an apparent usage calculation based on hard data such as domestic output and net trade to assess Chinese demand, it's no surprise that both the ICSG and ILZSG have lifted their estimates for the amount of metal being consumed in the country.

The struggling property sector remains a significant drag, although completion rates have recently picked up, lifting demand for fittings and household appliances, which is good news for base metals but not for steel.

More significant, however, is Beijing's targeted infrastructure spending which is going to metals-intensive sectors such as the power grid, electric vehicles (EV) and solar panels.

Such "green" investment appears to be acting as a major offset to the downturn in the traditional metals demand driver that is the commercial property market.

How long it will last is a moot point, given China's exports of both solar panels and EVs are generating increasing push-back from both the United States and the European Union.

MIXED SIGNALS

The energy transition and the resulting booster to metals demand was the core talking-point at this year's collective LME Week discussions.

Producers, particularly copper producers, were once again out in force with warnings about the potential shortfall of metal to meet the new wave of green demand.

Yet the LME metals have not yet escaped the gravitational pull of the traditional industry cycle.

It's the conflict between old and new cycles that has generated the mixed messages coming out of this year's annual gathering of the global metals industry in London.

The old cycle is still the more powerful for now and the result, if you believe the Study Groups, will be a shift to supply surplus across the base metals spectrum.

Only part of that surplus is yet visible in terms of exchange inventories, which remain historically low both in China and everywhere else.

The collapse in LME time-spreads, however, is a sign that excess metal is accumulating, even if it is still doing so largely in the off-exchange storage shadows.

A rebuild of stocks may not be a bad thing in the long run, given the forecast supply deficits looming on the horizon.

But most visitors to LME Week will have returned home braced for more short-term price weakness.

The opinions expressed here are those of the author, a columnist for Reuters.

(Editing by Sharon Singleton)