Commodities | Jan 11 2008
By Chris Shaw
Despite concerns over global economic growth at the forefront of investors’ minds base metal prices have begun the year strongly with nickel up 12%, copper up 8% and zinc up more than 5%.
But as Barclays Capital points out the run in the base metals sector follows significant price weakness in the December quarter last year, so it is more likely something of a relief rally than a sign concerns over the world growth outlook have been overdone.
Supporting the broker’s view this is indeed the case are the continued weak economic data coming out of the US, where it notes recent business sentiment surveys have returned results indicative of a recession while the fallout from the credit crisis continues.
Given the economic outlook Barclays suggests it will be difficult for base metals to continue to perform strongly, especially as metal specific factors are also showing signs of weakness.
One such factor is the ongoing increase in global metal inventories, with Barclays noting metal stockpiles are at their highest levels since the first quarter of 2006. In addition physical price premiums are yet to pick up despite the recent metal price gains.
While the short-term outlook appears negative Barclays has not turned away from its medium-term positive view on the sector, as it notes the China effect remains more strongly at play in the base metals than in most of the other commodity sectors.
Also supportive for the medium-term is the fact ore reserves continue to decline, new projects continue to be delayed and input and development costs continue to increase, all of which should help keep a floor under prices over the longer-term.
The group’s view is once financial market prospects improve the base metals sector should in fact be one of the largest beneficiaries, but it is still too early to for this to occur.
Increased fund interest in the commodities sector should also offer a boost once conditions improve, as Barclays points out 2007 saw investment in exchange traded products and new issuance of commodity structures increase by more than US$40 billion to US$175 billion, which shows the extent of underlying buying support.
Barclays analysis has reportedly been followed by a lowering of 2008 price forecasts for copper, lead, aluminium and zinc by sector specialists at UBS with the latter arguing softening demand growth in 2008 should result in tempered performance for base metals.
As the opposite is seen true for precious metals, UBS has lifted its average gold price estimate to US$825 per ounce in 2008 while noting the precious metal could trade as high as $1000 per ounce throughout the year.
UBS’s new price forecasts are: copper;US$3 per pound; lead US$1.20 per pound; zinc US$1.15 per pound; aluminium US$1.23 per pound; Gold;US$825 per ounce;and silver US$15.10 per ounce.