Date:27/03/2005 URL: http://www.thehindubusinessline.com/2005/03/27/stories/2005032700110400.htm

Back Metal prices may rise further in short term

G. Chandrashekhar

Mumbai , March 26

MARKET conditions for base metals remain extremely favourable for the upward price trends to stay intact. The prices are even expected to test fresh highs in the second quarter of the year.

Robust western world growth outlook, Chinese demand, continuing supply constraints, further fall in inventories from already low levels, investment appetite among funds and poor support from currencies are combining to keep the base metals market hot.

"Higher prices will be driven by concerns over supply shortages, with critically lower inventories being brought to market attention by robust global growth. As a result, we see a further 15 per cent upside potential from current prices to our spot targets on an aggregate basis and expect nearby spreads to widen," commented Ms Ingrid Sternby, a base metals analyst with Barclays Capital.

From the current level, the most upside potential exists for zinc, followed by copper and nickel, she said. The LME cash price for zinc has averaged $1,330 a tonne in the first quarter of this year. For the second quarter, the price forecast is $1,500 a tonne, after which the metal may edge down by $10 in each of the next two quarters. For the whole of the current calendar year, the forecast is $1,450 a tonne.

Copper, which recently breached the $3,300-a-tonne level, is forecast to rise to $3,600 a tonne in the second quarter, but then decline to $3,200 and further to $3,100 in the third and the last quarter of the year, respectively.

Base metal prices are expected to ease back through the second half of the year as increased refined metal availability is set against easing demand conditions.

Inventories would be built through the second half of the year. However, the inventory levels at the end of the year could still be lower than in the same period last year, which would mean lower opening stock for 2006.

While current prices are already high in nominal terms, they are inconveniently high for consumers (especially those needing to buy) and investment funds still looking for long exposure, but seemingly still not high enough for producers seeking to lock in attractive forward sales, while opportunistic short-selling is being discouraged by backwardations, Ms Sternby pointed out.

As for aluminium, it is already relatively closer to its justifiable peak level (about $1,950 a tonne).

sThe supply constraints are expected to ease considerably beyond the second quarter with larger-than-expected shipments from China and the restart of idle capacity in the US.