The Hindu Business Line : Base metals continue to be ruled by fundamentals: Barclays

‘Copper and aluminium markets have the best upside price potential as further production losses look likely. Problems like lower ore grades, tighter power markets likely to persist.’

G. Chandrashekhar

Mumbai, June 20 Contrary to popular belief that speculative buying has propelled commodity prices higher, fundamentals continue to remain a critical factor in determining price developments in the base metals sector, according to Barclays Capital.

Supply disruptions and uncertainties have been the bane of the market so far. While fundamentals are diverse across the base metals this year, one theme that has characterised the whole market is supply disruptions, Barclays said in a recent report, adding production losses have spanned several continents and have affected every metal.

Although there are several reasons for supply losses, power shortage has turned out to be the most disruptive. Demand for base metals has continued to stay robust, though slower so far. China has been consuming its inventory.

Inventory levels

This destocking process in China has probably masked the true strength of consumption, with underlying demand remaining strong, the report argued. Consumer inventory levels in the US and China, particularly for copper and aluminium, are low. This creates a potential for acceleration in demand growth in the second half of the year.

Barclays believes copper and aluminium markets have the best upside price potential as further production losses look likely. A host of problems such as lower ore grades, labour unrest and tighter power markets seem likely to persist. No wonder, price forecasts have been raised. “We forecast a record high quarterly average for copper of $9,000 a tonne and $4,000 a tonne for aluminium in the last quarter of 2008,” the report said.

Tin, zinc

As for tin, in the short-term there could be further upside for prices, but the current levels may not be sustained for the rest of the year. On zinc fundamentals, the report was bearish because of acceleration in anticipated supply growth which would weaken prices further. Barclays is relatively bearish on nickel fundamentals; however, recent supply disruptions highlight the risk for price spikes.