The Hindu Business Line : Further slide likely in metal prices

METAL prices have suffered a hefty correction during last couple of weeks, driven by fears of a slowdown in Chinese demand and tightening US monetary policy.

Notwithstanding this, there is belief that metal prices will strengthen again due to strong market specific fundamentals.

However, more fund liquidation is likely in the interim and even better buying opportunities may arise before metal prices start to peak, according to experts.

A further downside was likely, with potential falls of 10-20 per cent from current price levels, Barclays Capital said in its latest research report Base and Precious Metals.

This long liquidation is being driven by market perceptions of a move forward in the interest rate cycle; a strong dollar; moderation in some leading growth indicators and in freight rates; plus, finally, signs that China will slow in the coming months with its government determined to prevent overheating.

The extent of the price declines have broken the previous upward trend and triggered mass selling from systems-based traders. "We expect technically based trading, plus some weaker metals-related data to push metal prices lower," the report stated.

However, there are factors positive to prices. In the western world, industrial metal inventory levels throughout the manufacturing chain are extremely low. In particular, growth in primary metal sales in the US has exceeded growth in inventory levels.

This should be seen in the context of the emerging possibility of strong global economic growth in 2004 and 2005. Strong economic growth is expected to not only exert upward pressure on interest rates, but also prove positive for commodity prices, Barclays pointed out.

Nickel is often seen a leading the metals complex at key turning points and has fulfilled that role during this cycle. Nickel led the complex during the rally from 2001 and prices peaked back in the first week of this year. Since then nickel prices have declined by more than 40 per cent.

Given the heavy retracement in metal prices over the past weeks, the earlier decline in nickel can again be seen to have led the metals complex. Precious metals have also largely followed similar pattern to that of nickel.

Gold has actually moved pro-cyclically with nickel, although its moves have not been as large, according to Mr Kamal Naqvi, precious metals analyst, said all the white metals had lagged the nickel price pattern in a similar manner, but had retraced with far more speed during April.

Barclays' analysis showed that all the industrial metals have a constructive physical fundamentally driven outlook, with relatively low excess inventories and market deficits in 2004, and in most cases in 2005 also.

"The metals that are clearly `hottest' are nickel, tin and copper, and so we remain extremely bullish on these metals. We also see constructive moves in lead, zinc and platinum," Barclays said.

The weakest of these metals (excluding gold, silver and palladium where the physical fundamentals and inventory overhang are extremely poor), on the basis of current supply and demand analysis, is aluminium.

Even in this case, there was potential for alumina and power shortages to move the aluminium market from balance into deficit during 2004, Barclays said.