The consensus among forecasters is that base metals peaked in 2006 and, depending on the metal, will head lower this year as the global economy slows. If the consensus is correct, the reversal may mark the end of a four-year bull market for base metals that has recently sent prices to unprecedented highs.

But the sector has defied bearish forecasts before, especially in 2006, when prices considered “inflated” at the beginning of the year headed much higher. Nickel jumped 158%, zinc gained 142%, and lead and copper added 54% and 36%, respectively, by yearend.

One of the few long-term bulls left standing, Greg Barnes of Toronto-based TD Newcrest, says: “We remain of the view that the combined impact of China’s emergence as a major consumer of base metals and the delayed response by the mining industry to increase supply will continue to reverberate through the metals markets for at least several more years.”

But other analysts believe 2007 may be a turning point for the sector as the numbers show demand is beginning to slow in the major markets of China and the U.S., while supply — at least, for some metals — is finally increasing as a result of investment in mine development in response to higher prices. The key, these analysts say, is looking at each metal individually rather than at the sector as a whole.

“Price movements should be more muted than last year, and more individual, based on how balanced each metal’s supply/demand picture is,” mining analysts David Coffin and Eric Coffin wrote in the January issue of their Phoenix, Ariz.-based monthly newsletter, Hard Rock Analyst Journal.

Copper has been pegged for further losses, even though the price of the base metal fell to a nine-month low in January. London-based GFMS Metals Consulting Ltd. believes a continuing downturn in the copper-dependent U.S. housing sector, combined with lower Chinese imports and a more stable supply environment, will lead to a surplus in 2007.

Zinc and nickel are expected to replace copper as sector leaders. Toronto-based Bank of Nova Scotiaand London-based Standard Bank have chosen zinc as their top commodity pick for 2007 because demand from U.S. non-residential construction and from China remains strong, while London Metal Exchange stocks continue to decline. “Zinc will probably move even higher in the first half of 2007, before significant mine expansion begins to trim prices in late 2007 and in 2008,” economist Patricia Mohr at Bank of Nova Scotia reported in her yearend commodity review.

Wild cards could skew projections. One is lack of a “buffer” in LME inventories, meaning stocks are vulnerable to supply disruptions like those that plagued the sector in 2006. Supply disruptions, in the form of strikes and technical problems, are so common that London-based Natexis Commodity Markets Ltd. has raised its “disruption allowance” to account for production loss in 2007.

Investment funds have a strong influence on metal prices. They’ve propped up the bull market so far but could turn bearish as they register the wide discrepancy between spot prices and long-term average prices for metals, Natexis says.

Here are the forecast summaries for the most significant metals:

> Copper. Analysts are mostly bearish about the price of copper, which headed south in 2006 and recently hit a nine-month low.

GFMS, which has been forecasting a move into oversupply for some time, says demand for copper cathode for U.S. automotive and residential construction is poor. Demand was also down 6.4% year-over-year in China in the first nine months of 2006, and copper imports into that country have fallen even more dramatically.

At the same time, the resolution of labour strife at several mines, and higher LME stock levels, have eased supply concerns.

But Natexis sees supply disruptions preventing inventories from building to high enough levels to trigger a significant correction in the copper price, even though the trading firm believes copper has peaked: “The recent outcome of negotiations between miners and the Chinese smelters highlights how supply disruptions have restricted concentrate supply. Forthcoming labour contract renewals mean further problems may emerge.”

Standard Bank has not jumped on the bear’s bandwagon, and speculates that lower prices may mean aggressive restocking in China.

GFMS is calling for a 265,000-tonne surplus in 2007 and an average annual price of US$5,600/tonne ($2.54/lb.), while Natexis projects a 50,000-tonne surplus for an average annual price of $6,000/tonne ($2.72/lb.).

@page_break@Copper averaged US$6,730/tonne ($3.05/lb.) in 2006.

> Lead. Supply disruptions, particularly in Australia and Germany, helped propel lead to a new intraday high of slightly more than US$1,800/tonne (US82¢/lb.) this past December. However, GFMS says it takes only a modest deterioration in fundamentals to spark a sharp correction in the lead market.

The key to the supply/demand balance rests with China, where a significant amount of new capacity is expected to come onstream in 2007, resulting in a small surplus.

Natexis agrees that the lead market, with supply disruptions behind it, will respond to increased production in China by moving into a surplus in 2007, although “lead prices should remain exceptionally high compared with previous levels.”

Average price forecasts for 2007 range from US$1,175/tonne (US53¢/lb.) to US$1,425/tonne (US65¢/lb.), with GFMS projecting a modest surplus of 60,000 tonnes.

Lead averaged US$1,288/tonne (US58¢/lb.) in 2006.

> Nickel. Nickel was the star performer in 2006, hitting a new intraday record high of US$35,000/tonne (US$16/lb.) in mid-December, and analysts expect another strong year in 2007 because there is little new production coming into the market. Meanwhile, demand from the stainless steel sector remains buoyant.

However, GFMS cautions that China is importing an increasing amount of low-grade ore from Southeast Asia. Substitution is becoming more of an issue as prices move higher. Although GFMS has increased its average price projections to US$25,500/tonne (US$11.56/lb.) in 2007, it believes “there is the potential for a significant correction in the nickel market,” in part because of weakness elsewhere in the sector.

Natexis also believes the threat of supply disruptions that helped buoy the nickel market in 2006 may be overdone, resulting in higher than expected production. The metal is also vulnerable to the rejigging of the Dow Jones commodity index, which is reducing its nickel weighting in favour of metals that underperformed in 2006.

Standard Bank agrees that fund liquidation selling and index reweightings could put negative pressure on the nickel price. But it believes, given nickel’s strong fundamentals, the market will see the sell-off as a buying opportunity.

Average price projections for 2007 range from US$22,500/tonne (US$10.20/lb.) to US$26,200/tonne (US$11.90/lb.), with prices moving lower as the year progresses.

In 2006, nickel averaged US$24,287/tonne (US$11.01/lb.).

> Zinc. A metal expected to remain in deficit for most of 2007, zinc represents strength among the sector’s general weakness for the majority of analysts. Low inventories, a tight concentrate market and strong underlying demand growth is expected to keep the price buoyant in the first half of 2007.

Standard Bank expects zinc to rally as high as US$5,000/tonne (US$2.27/lb.) in 2007. GFMS calls for an average price of US$3,600/tonne (US$1.63/lb.). Considering new supply at yearend, Natexis expects an average of US$2,800/tonne (US$1.27/lb.).

In 2006, zinc averaged US$3,273/tonne (US$1.48/lb.). IE