Commodities | May 15 2006
By Greg Peel
How high can we go? Copper at US$10,000/t? Aluminium at US$3,500/t, zinc at US$4,000/t and nickel at US$25,000/t? This is the question being asked by resource analysts at UBS, who suggest it is clear that base metals have detached from fundamental drivers. This makes them "vulnerable to a sudden and unforecastable change in sentiment".
However, both UBS and SB Citigroup analysts have reviewed the facts and note that the fundamentals nevertheless continue to be supportive. The supply side is just not catching up, and the problem is exacerbated by increasing costs and a "lack of men and materials", as Citi puts it.
Demand is just not dropping off in the face of high prices because opportunities for substitution do not exist – everything is now at a much higher price.
And the money flows relentlessly in. UBS notes investment shows no sign of slowing. Citi is surprised by the weight of money which has exceeded its expectations. Citi has increased its price forecasts yet again. "Is this the last hurrah?", asks Citi.
Citi is not predicting that prices will continue ever higher. However, the analysts note that while "bubble" talk is popular, there is nothing on the horizon that might trigger a collapse in demand. UBS believes prices will continue to firm in the near term, but then so will correction risk. If we do see a correction, says UBS, it will be to levels much higher than long term averages.