The Hindu Business Line : Metals likely to bounce back by year-end

Firm outlook
Despite a possible slowdown in US growth, demand for metals is likely to be supported by continued rise in Chinese consumption
Although base metals have got caught in a broad-based commodity sell-off, experts say that their fundamentals remain strong

Mumbai , Sept. 17

The tussle between bulls and bears in the global marketplace is far from over. Last week saw bears succeed in loosening the bull stronghold of several weeks with base metals prices generally falling 7-10 per cent on the week.

The battleground is the global economic outlook, particularly the outlook for the US economy.

The extent to which weakness in demand in the developed world can be offset by demand in strength in China and the potential for further supply losses are questions uppermost on the minds of investors.

Metals consumption

The latest OECD composite leading indicators provided little comfort to the metals complex. There is a strong positive correlation between economic growth and metals consumption.

Interestingly, together with falling energy prices, falling metals prices should help reduce inflationary pressures and be positive for growth outlook. Experts assert that despite a possible slowdown in US growth, demand for metals is unlikely to take a beating, as it is supported strongly by continued Chinese economic growth leading to rise in base metals consumption.

For instance, China's copper demand this year has been below expectation because of destocking which is now expected to have run its course.

Fresh demand should commence soon, analysts assert. Between now and the end of the year, there is strong likelihood of further inventory drawdowns in copper, zinc and even aluminium, which would support prices.

Strong fundamentals

Although base metals have got caught in a broad-based commodity sell-off led by oil, their fundamentals continue to remain quite strong (indeed, stronger than that of oil) and point to firming prices in the near term. It must however be added that small surpluses could develop in copper, zinc and aluminium in 2007 which could push prices down in the first half of next year.

In other words, with inventories critically low and demand prospects somewhat uncertain, prices would be extremely sensitive to changes in the market balance. Investors should be aware that risk around any price forecast for next year is large.

Gold prices

Long liquidation prompted by easing oil prices, surprising resilience of the US dollar and technical factors together pushed gold prices to a recent low towards the end of last week. On Friday, London PM fix was $573.60 an ounce.

While the market was largely driven by a steep fall in oil prices (OPEC basket price fell below $60 a barrel for the first time since March 2006 - OPEC's latest monthly report continues to present a bearish view of market balances), other macro-economic factors are playing a part.

Inflation expectations, especially in the US, have moved lower and geopolitical concerns have eased.

On the fundamental side, demand growth has been sluggish. Weak buying has resulted from high and volatile prices in recent months.

A combination of all these was enough to drive gold lower to touch new support levels. Experts assert it is time to buy gold and that it should be bought on dips.

The yellow metals price movement will depend largely on the strength or otherwise of the dollar. There is expectation that the currency will begin to weaken towards the end of the year, which should prove positive for gold.

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