The year 2006 is set to be the fifth-consecutive strong year for base metals as the serious supply constraints evident through 2005 will not be swiftly resolved, according to a report by Barclays Capital. This year is expected to witness copper, zinc and aluminium hitting new highs. | |
| The report notes that contradictory to the general perception, high prices have "failed to rapidly attract new production". |
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| "At the same time, the global demand environment has remained strong. This powerful combination, as well as extremely low global metals inventories, will generate even higher prices in 2006," the report said. |
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| Instead of copper that was the star performer of 2005, zinc is expected to lead the base metal complex this year, followed by nickel, copper, aluminium, tin and lead. Their prices are expected to rise 10-15 per cent from the current levels in the first half of the year, which is expected to be cyclical peaks, said the report. |
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| With a global low interest rate environment, robust growth and prospects of a weaker US dollar, the market scenario remains extremely positive for metals. |
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| The prospects for a weaker dollar this year are a positive for metals. "First, the US dollar depreciation is likely to attract investment money into assets with traditional negative correlation to the currency. Indeed, the dollar strength (against the euro) last year failed to pressure metals prices, but only because other metal-specific fundamental factors were sufficiently forceful, such as supply disruptions. China's metals demand is expected to continue to grow strongly due to domestic infrastructure-led demand, even in the event of an external economic slowdown, the report said. |
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| Strong demand from emerging markets, for example India, is also gaining ground, it added. "But serious short- and long-term supply constraints persist, and production costs are on the rise. We believe the risk of a sudden near-term flow of new production causing a correction in prices is, therefore, small," the report said. |
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| According to Baclays, fund involvement is also widely regarded as a threat to the sustainability of high base metals prices. |
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| "Long-term investment money continues to flow into commodity markets, including the base metals. This trend shows no signs of abating, and investment into structured products (often including more base metals than the broad-based indices, partly due to attractive shapes of the forward curves) is increasing," it said. |
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| It adds that there is a risk of substantial fund-driven corrections in prices. "In the event of downside price pressure, it is likely to be shallow and brief once again, given the amount of buying interest from consumers and funds on lower numbers." |
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| ON A ROLL
2006 is expected to witness copper, zinc and aluminium hitting new highs, according to Barclays report The prospects for a weaker dollar this year are a positive for metals Serious short- and long-term supply constraints persist, and production costs are on the rise Long-term investment money continues to flow into commodity markets, including base metals and this trend shows no signs of abating |
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