Commodities | Feb 19 2007
By Greg Peel
If there is any consensus among metals analysts it is that nickel and zinc should remain strong due to supply shortage, aluminium should falter due to excess Chinese alumina production, and copper should be unspectacular. Consensus also leans strongly to the bullish side for gold and silver.
In their latest update from their Zurich office, Credit Suisse global analysts have thrown their hat into the ring.
Precious metals, they say, “continue to harbour upside potential”. While the first quarter of the year is usually a quiet one for gold, post the Asian wedding and gift-giving seasons, it appears that jewellery demand is remaining robust. Evidence suggests there is also a constant flow of investor money into ETFs and other gold derivatives. Recent weeks have seen a boost in interest.
The supply side for gold remains tight. European central bank selling has dried up, and gold production in South Africa fell 12.4% over 2006.
The gold price will nevertheless be volatile going forward, says Credit Suisse. A big build-up of investors positions means panic profit-taking can be triggered at the slightest hint of trouble. However, as physical demand is strengthening, the typical gold price drivers of the US dollar and the oil price will diminish in significance.
A strong week for base metals has seen some breakthroughs of significant psychological levels, the analysts note. This was primarily due to stronger than expected GDP data coming out of Europe, and indications that Chinese imports have been on the rise. However, Credit Suisse does not see this trend holding in the short term, and downside risks continue to loom, particularly for copper.
Credit Suisse believes, however, that base metals will again start their upward trend towards the end of the year, as “global industrial production picks up some steam again”.
Over in London, analysts at Goldman Sachs put the recent rally in the aluminium price down to two factors. Firstly, there has been what has now become commonplace – a strike – this time in Guinea. Secondly, for a long time one party has alone held 80-90% of what are now just-out-of-the-money aluminium warrants at the LME. (A warrant is similar to a call option).
The key to aluminium is, however, Chinese alumina production. China is on track to produce 20Mt of alumina this year, which will reduce demand for imported alumina and thus weigh on alumina prices.
Chinese copper imports have soared at the beginning of 2007, suggesting the destocking cycle is complete and a restocking cycle is underway. As to whether this is sustainable is questioned by some analysts. Of the four major base metals, copper is the most contentious amongst market watchers. While the consensus appears to be that copper will not be a spectacular as it has been in the past, analysts are then split on whether the short term will see weakness or strength.