Date:19/07/2005 URL: http://www.thehindubusinessline.com/2005/07/19/stories/2005071900071100.htm

Back Metals to rise on low supply, robust demand

G. Chandrashekhar

With global stocks lower than historical averages, potential exists for prolonged period of better prices for the next five years and beyond.

Mumbai , July 18

WITH signs that the period of weaker growth may be ending, the risks to commodities prices may well be to the upside, experts assert. Even during weak growth of last one year, commodity prices, especially metals, far from crashing, have remained fairly robust.

The past one year has seen significant deterioration in demand growth for a number of commodities. Copper, zinc and steel demand has fallen in the West so far this year due to slower industrial production growth.

Chinese demand growth rates were hit during the second half of 2004 and early 2005 by the credit tightening measures introduced by the Chinese Government in May 2004, leading to a heavy de-stocking cycle.

"With global inventories for the most part lower than historical averages and capacity utilisation rates likely to remain higher, we see the potential for a prolonged period of better prices unfolding over the next five years and beyond," asserted Mr Jim Lennon, analyst with Macquarie Research.

The strength of prices in the face of weaker demand growth was unusual in the history of metals markets and reflected the unfolding of a stronger-for-longer period for metals and steel demand, he pointed out.

Main drivers of the expected sustainable bullish performance of commodity prices include anticipated strong Chinese growth rates into the foreseeable future (despite recent slowdown in growth rate) and under-investment in new capacity which has raised existing capacity utilisation to a new high and reduced stocks to unexpectedly low levels.

It is believed that capacity expansion going forward are likely to be too-little too-late in many industries for much longer than currently recognised due to greater supply-side discipline, large capital cost escalation, shortage of infrastructure, long lead time for construction and so on.

Importantly, higher energy and other costs will lead to higher industry cash costs and over the longer-term, raising breakeven cash costs and also longer-run prices.