Commodities | Oct 05 2007
By Chris Shaw
It appears the timing for LME Week next week in London couldn’t be better as Barclays Capital notes interest in the metals markets has never been higher given open interest positions in LME contracts are at record levels.
The group suggests the key theme of the week is likely to be the ongoing strength of demand so far in 2007, with China continuing to lead the way on this front. According to Barclays the outlook is for this strength to continue, while any slowdown as a result of weaker growth in the US economy appears likely to be modest at best.
In the group’s view the solid price performance in the September quarter sets the stage for further gains in the final quarter of the year, particularly as the record open interest levels suggests investors are looking past the short-term volatility in the market and focusing more on the actual outlooks for the various metals.
Here the group sees upside potential in copper prices thanks to ongoing tightness in raw material markets, low inventory levels and the possibility of a significant pick-up in Chinese buying in coming months.
Lead also looks good, the group suggesting recent production losses have impacted on supply growth and so forcing down LME stocks just as the market is about to enter its seasonally stronger buying period.
There are contrasting outlooks for zinc and aluminium in the group’s view, the former enjoying strong demand and tighter physical supply in the short-term that should support prices but the latter suffering from a lack of inspiring market fundamentals.
For nickel the stainless steel de-stocking process of recent months has impacted and though there should be some modest improvement in fundamentals in coming months this is not expected to be strong.
ANZ Bank senior commodity strategist Mark Pervan agrees with the nickel assessment, suggesting the current nickel rally is a dead cat bounce as mine supply is not as tight as previously thought, as evidenced by rising LME stockpiles. With changes in market regulations meaning speculative stock hoarding has been eliminated he also doesn’t see prices rising strongly in coming months.
He is also a little more cautious than Barclays on the outlook for LME prices generally in the short-term, suggesting traditional unease in markets in October and the current uncertainty in financial markets as a result of the credit crisis provide scope for some price weakness, particularly as commodity prices have now enjoyed a few weeks of gains.
Adding to the scope for some profit taking in his view is some markets, and he is referring to copper and lead in particular, have already priced in a lot of good news and so are somewhat vulnerable shorter-term. The outlook should improve in November though as this is typically the start of the re-stocking period, with Pervan listing copper as his top pick given a number of recent mine strikes should limit supply in coming months.
Zinc also has the potential to surprise on the upside in his view, especially if current higher prices in Shanghai can induce an increase in refined imports in the Chinese market.
With a lot of economic data on the US economy out in coming weeks Pervan is positive on the gold price outlook as he sees scope for further weakness in the US dollar, while also supportive should be additional buying as India enters its traditional wedding season.
Stronger oil prices should also be supportive for the gold market as he sees scope for producers to lift production of heating oil in coming weeks as they prepare for the northern hemisphere winter. Merrill Lynch agrees and has lifted its oil price forecasts for both the final quarter of this year and for 2008.
For the current three months the broker now expects an average oil price of US$80 per barrel, up from US$67.50 previously, while next year it sees prices averaging US$73 per barrel, up from US$66 previously. Given the broker has revised down its expectation of non-OPEC supply growth this year by almost one-quarter it points out the risk to its oil price forecasts remain to the upside.
In terms of price forecasts for the metals, ANZ Bank expects prices as at the end of December in US dollars per tonne of $2,560 for aluminium, $6,940 for copper, $29,760 for nickel, $3.280 for zinc, $2,470 for lead and $13,010 for tin. As at the end of June next year it sees prices of $2,470 for aluminium, $7,270 for copper, $30,860 for nickel, $3,090 for zinc, $1,980 for lead and $11,680 for tin.
In contrast Barclays has average quarterly price forecasts for the December quarter in US dollars per tonne of $2,700 for aluminium, $8,000 for copper, $3,300 for lead, $34,000 for nickel, $3,200 for zinc and $15,500 for tin.
Its second quarter 2008 average price forecasts are $2,750 for aluminium, $8,500 for copper, $2,200 for lead, $35,000 for nickel, $2,950 for zinc and $15,400 for tin.
Short-term the two group’s don’t see eye to eye on the gold price, Barclays forecasting an average price for the current quarter of US$750 per ounce and in the June quarter next year of US$670 per ounce, while ANZ is at US$690 per ounce for the current quarter and US$660 per ounce as at the end of June next year.
