The Hindu Business Line : Base metal prices likely to rise in Q4

BASE metal prices have declined after peaking in April, but a strong upside for prices seems to be in evidence as global economic growth prospects, low inventories and a deficit base metal market combine.

Base metal prices that have retraced some 15 per cent since April, are expected to fall further before beginning their second leg of price ascent. Evidence of a cooling Chinese economy is expected to cause a period of de-stocking while the perception of a move forward in the interest rate cycle and consequent dollar strength is also taking the shine of metal prices.

Together with deteriorating technical chart patterns, signs of strong leading demand indicators topping out are likely to discourage fresh long exposure to the industrial metals at current prices by investment funds, experts pointed out.

``A global economy experiencing its strongest two-year pace of growth in almost 30 years against low metal inventories and deficit base metal markets will drive metal prices higher again to their ultimate cyclical peak in fourth quarter of this year to the first quarter of 2005,'' Barclays Capital noted in its latest commodities research report.

The report said during periods of extreme supply tightness in the past, base metal prices had shown strong resilience to adverse currency movements and slowing growth.

In the long-term, base metal prices are expected to move higher on the basis of a structural shift higher in metals consumption, driven by emerging markets, primarily China, and low investment into new output capacity.

Medium- to long-term trends in Chinese demand remain positive, partly because of investment into the power sector and partly due to the ongoing consumer demand growth.

Barclays Capital said the rally would be driven by real physical tightness as primary metal inventory levels are running extremely low.

``Because of seasonal and typical cyclical patterns, we expect the timing of the next upward move to vary across the base metals. Lead is expected to peak in the fourth quarter of this year, ahead of most others based on expectations of a pick-up in winter battery demand; while the lead market is likely to be in a modest surplus next year, in contrast to all other base metal markets,'' the report forecast.

Zinc will be the laggard in this move higher, which will be in line with previous commodity cycles. Unlike most other base metals, zinc prices are still held back by large stockpiles of refined metal. But as these are being gradually depleted, a more sustained rally through the first half of next year may be expected.

Nickel will continue to lead the base metal complex. Nickel prices are now consolidating their losses since their peak at the beginning of the year.

Copper and tin are also expected to perform particularly well because of tight supplies, while tin and aluminium are believed to have the potential to see strong price gains. These two metals have been under-performing in this particular commodity bull market; their supply side fundamentals will improve sufficiently further to justify fresh price peaks, the report pointed out.