The Hindu Business Line : Metal prices may continue to remain firm

Bucking the trend
Factors like strong demand, low inventories, stock drawdowns and supply disruption fears to support prices.
Fund flows are expected to continue as institutional investors are under-invested in commodities.

Mumbai , Oct. 8

Metals markets could buck the general global trend of growth concerns affecting commodity prices.

Even as several agricultural and non-agricultural commodity markets reel under the negative impact of widely feared economic slowdown, metals markets have remained largely immune and are expected to not only continue to remain firm but also show stronger prices for longer periods.

Supporting Prices

Indeed, there is nothing to suggest a bearish view of the market. Extremely tight fundamentals including continuing strong demand, low inventories, stock drawdowns and supply disruption fears have all combined to support prices.

Experts see an upside to prices from the current levels and the next two quarters are likely to be price positive.

As per latest OECD report, the composite leading indicator (CLI) for August dropped to 1.8 per cent from 2.4 per cent in July, showing the lowest CLI since August 2005.

It suggests that economic growth in the OECD region will be much slower in 2007.

Although, traditionally, the aforesaid decline would be a clear sell-signal for the base metals, the market is far from facing a sell-off.

Some base metals gained over the week and especially after announcement the of CLI data.

Metals Gain

For instance, zinc surged 7 per cent last week gaining 4 per cent on Friday.

Other metals were virtually unchanged on the week, indeed recovering towards the latter part of the week.

Tin benefited from supply disruptions. Indeed, there is belief that a fall in commodity prices led by crude oil could potentially spur increased economic activity that would prove positive for base metals. Clearly, underlying demand conditions in most markets remain good with strong demand from metals consuming sectors such as steel industry, commercial construction and infrastructure.

Growth Market

Led by China, Asian region is again clearly the growth market.

On the other hand, mine supply continues to under-perform, while raw materials market remains tight (except of course that of alumina which has weakened significantly). Inventory levels already low are falling.

So, the markets are more vulnerable to supply disruptions and/or demand surges. Copper is one metal that could be subject to supply hiccups due to upcoming labour negotiations. Investor interest in commodity market is far from waning. Fund flows are expected to continue as institutional investors are under-invested in commodities.

Metal Prices

Overall, in terms of short-term price upside potential over the next three quarters, copper, nickel and zinc are the metals to watch closely. As base metals demand growth rates move up and production costs rise, consumers will have to get used to higher long-term average prices than in the past.

This expectation also creates investment opportunities in base metals. Nickel, copper, zinc and lead show promise on current reckoning.