The broker, in releasing its Commodities Compendium, said it had raised its already bullish profile for iron ore, reflecting its view that supply growth will underperform expectations, while Chinese mine cost inflation underpins the spot price.

“We would reiterate our view that a combination of factors (including ore degradation and spiralling capital intensity) are likely to see the supply side underperform in the medium term,” Macquarie said.

“The upshot is that more Chinese domestic ore is required to balance the market for longer, while cost inflation in this mining sector will underpin spot prices at ever higher levels.”

The same issues which underpinned the high spot price last year remained prevalent, while China’s appetite for seaborne ore was set to return with a vengeance.

“The current spot price of around $US175/tonne reflects a market which is undersupplied and furthermore, we expect black furnace output to rise sequentially through the first quarter while seaborne ore volumes are likely to fall, further supporting an elevated spot price,” the broker continued.

“At the same time last year, the one buffer known in the market was that around 100 million tonnes per annum of Chinese domestic production could be pulled back into the cost curve if the price was right (and it was).”

Taking a 12-month view, Macquarie also upgraded its outlook for copper and coking coal, while it expects nickel, zinc and steel will “significantly underperform relative to other commodities”

In terms of copper, the broker said it faced many doubters, as was the case with the red metal early last year.

“After posting a global deficit of about 200,000t in 2010 we expect that market fundamentals will continue to catch up with the price in 2011,” Macquarie said.

“We model that a 500,000t deficit will take stocks down to critically low levels and drive copper prices up to $US5.50/pound by the second half of 2011, with forecast average prices of $5/lb.”

The past year was a very volatile time for the metal as the market grappled with rising Chinese interest rates, a crackdown on Chinese property speculation and concerns over the stability of a number of the smaller European economies.

“However, we do not expect the same volatility in the first half of 2011 and see prices rising to average $4.80/lb in the second quarter on the back of moderating Chinese de-stocking following a period of sharp de-stocking in 2010,” Macquarie said.

In terms of nickel, prices tend to lead to stainless steel price changes, but the broker says the big question mark for the latter is the extent of de-stocking and restocking in 2009 and 2010.

“The 2011 bears are arguing that restocking accounted for close to 2Mt of the 5.5Mt year-on-year growth in production in 2010 and that if there is no stocking this year and only modest real consumption growth in 2011, there could be a fall in global production,” Macquarie said.

“Our view is that the apparent demand growth in China last year of only 7 per cent suggests in fact that there was destocking in China, suggesting that Chinese consumption base was higher and that there is upside to Chinese production.

“We remain positive about the outlook for global production in the 2011-15 period, with average growth in global production of close to 5-6 per cent per year.”

As for zinc, its price underperformed the London Metal Exchange market as a whole over last year and is the only one of the base metals that has fallen since the start of last year.

“In our opinion, this properly reflects the fundamental position of a market that has run a substantial cumulative surplus over the last three years from 2008-2010, which can be seen in the build-up of reported zinc stocks,” Macquarie said.

“While we think that the balance in the zinc market has indeed improved over the last year, and is no longer running a significant surplus, we also think that the market is presently well-priced at about $1.10/lb.”