Tight supplies, strong Chinese demand bolster nonferrous metals outlook

Base metal prices will ride a wave of tight supply, dollar weakness and Chinese demand to bolster prices into 2008 but the picture further out is murkier. A recent Reuters report outlined the views of several metals analysts who compiled metals industry outlooks for the London Metal Exchange's annual event in October. According to the Reuters report, the consensus is:

• China's voracious appetite for nonferrous metals remains undimmed, with its immense purchasing power barely affected by global rumpus that emerged during the summer crisis in credit markets.
• Physical metals supply tightness this year will continue into next year, exacerbated by mining and smelting disruptions and processing production delays.
• Commodities remain in focus for investment diversification, with pension funds diversifying their assets away from stocks, mostly to indices which buy and hold commodity futures.

Global markets were sent into spasms in late July and August as a crisis in global liquidity emerged from problems in the U.S. high risk, or subprime mortgage, sector. Stock values, foreign exchange valuations and prices of some key commodities were roiled by spiking volatility and risk aversion in a dash for cash fuelled by worries about the impact of the global credit market squeeze.

According to Reuters, base metal prices recovered losses quickly with some, such as lead, reaching record highs as speculators bet heavily on tight supply. The dollar hitting successive record lows vs. the Euro also made dollar-priced metals cheaper for non-U.S. investors.

Some analysts, however, are worried that further fallout from the credit crisis has yet to unfold. Standard Bank said this fallout could come through in the fourth quarter and beyond with a few clouds on the horizon such as: "a slight downward revision to the U.S. economic outlook in 2008 owing to continuing problems in the U.S. housing market."

"China (and to a lesser, but increasing extent, India) has become such a dominant force that economic weakness in the U.S. is being overshadowed and offset by China's continued growth," Standard Bank said in the Reuters report. China is a producer and a consumer. But plans to build new houses and offices and expand its rail network over the next few years have more than sustained metal demand.

"The 2008 outlook for LME metals hinges on the sustainability of China's expansion plans, and the capacity for commodity exporting countries to meet that demand growth," Mitsui Bussan Commodities says, adding that its primary production capacity expansion was vulnerable to raw material supply risks.

The tight copper market is highlighted by several accidents and stoppages in key producing countries and companies, such as the recent stoppage at Southern Copper in Peru. Barclays Capital says copper in particular was at risk of considerable fundamental tightening, with raw materials tight, inventory levels low and the prospect of a big pick-up in Chinese buying.

ABN Amro says, however, that the tide was turning for copper and other industrial metals, with a period of global supply surpluses, build-in inventory and a declining price environment. The bank believes copper's period of surplus could last through to 2011.

"We estimate that these surpluses will by the end of our forecast period total 1.65 million metric tons," it adds.

That's why ABN Amro analysts see spot copper price declining to an average $3.15/lb in 2008 from an estimated $3.35 this year. Meanwhile, a more-bullish Mitsui Bussan Commodities has estimated prices for benchmark copper averaging $3.68 in 2008 after a median of $3.60 in 2007. Also bullish are Credit Suisse analysts, who say there still is a likelihood of a spike in the copper price next year.

                                                                                                       From: Purchasing.com