LONDON (Reuters) - Resurgent industrial metals prices, powered by enthusiasm for the electric vehicle (EV) revolution and a Chinese pollution crackdown are starting to look overcooked - raising the risk of a correction next year, a Reuters poll showed.
Copper is due to move into surplus next year while aluminum prices have already absorbed the impact of Chinese smelter shutdowns that will send the global market into deficit.
Nickel prices, boosted recently by an expected surge in demand from EVs, have also overshot and are due to correct next year, according to the poll.
“We think that many of the markets have tightened, justifying a rise in prices,” said Caroline Bain, chief commodities economist at Capital Economics in London.
“However, we also think that investor enthusiasm has pushed prices higher than can be justified by fundamentals. As such, we do not think prices at these highs are sustainable.”
About a tenth of China’s aluminum smelting capacity is due to be shuttered by the year-end as the government ramps up its winter campaign to reduce smog and whittle down excess production.
Analysts polled by Reuters flipped their consensus estimate of the market balance this year from a surplus of 125,000 tonnes in the previous poll in July into a deficit of 246,000 tonnes.
Next year, the deficit is due to narrow to 100,000 tonnes, according to the latest poll.
Aluminum and nickel are the best performers on the London Metal Exchange this year, each with 25 percent gains. Aluminum hit a five-year peak of $2,215 a tonne last month.
But aluminum prices may have already peaked, according to the poll, with the median forecast of 29 analysts for the average 2018 price of LME cash aluminum at $2,038 a tonne, down 3.5 percent from Tuesday’s close.
Nickel was a hot topic at this year LME Week industry gathering, with investors excited about prospects for surging battery demand in the growing EV sector.
Analysts marked up their cash nickel forecasts by 6 percent from the previous poll to $10,904 a tonne for average 2018 prices, although like aluminum, this represents a fall from current levels of $12,599 based on Tuesday’s close.
Nickel, which touched a two-year peak of $13,030 a tonne on Nov. 1, is expected to broaden demand to EVs from its main sector stainless steel, but many analysts caution that it will take years to realize this.
“Hype around EV batteries is perhaps pushing (nickel) markets a little too far a little too early, but without a doubt, EV battery demand will drive a new form of demand to grow strongly over coming years,” said UBS commodities strategist Lachlan Shaw in Melbourne.
Analysts in the poll pegged a global nickel deficit of 49,350 tonnes this year and 43,000 tonnes in 2018.
Analysts expect copper prices to deflate after speculators ignited the market this year, initially on worries of shortages due to strikes at major mines, and more recently on hopes for stronger demand from EVs.
Market balance is due to move from a deficit of 80,000 tonnes this year to a surplus of 93,000 tonnes in 2018, the poll showed.
The average LME cash copper price next year is expected to fall to $6,315 a tonne, down 7 percent from Tuesday’s close, analysts said.
Prices have gained 23 percent this year, hitting a three-year high of $7,177 a tonne in mid-October.
Over the past two years, zinc is by far the best LME performer, more than doubling and hitting its highest levels in a decade at a peak of $3,326 a tonne on Nov. 1, after last year’s closures and suspensions of major mines.
But LME cash zinc is expected to average $2,979 next year, down 7 percent from Tuesday’s close.
Analysts in the poll sharply marked down the size of expected deficits. This year is forecast at 289,000 tonnes, down from 412,000 in the previous poll, while next year’s shortfall is now seen at 120,500 tonnes instead of 190,000.
Additional reporting by Arpan Varghese in Bengaluru; Editing by Veronica Brown and David Evans