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Base metals prices forecast to remain high next year

Base metals prices have suffered sharp falls after surging by 50 percent this year, but analysts expect prices to remain at lofty heights going into next year thanks to strong demand and investor interest.

After scaling a first peak early this year, base metals prices saw another surge late last month and early this month to fresh multi-year highs, before plunging last week on worries about a possible cooling of China's economy.

Base metals prices endured one of the heaviest single-day falls on record on Wednesday, as dealers took profits and showed concern about the outlook for the Chinese economy, a huge source of demand for metals, analysts said.

On the London Metals Exchange (LME), the world's leading base metals market, copper prices tumbled by 10 percent in one day, nickel by 18 percent, aluminum over 7 percent, tin 4 percent, lead 5 percent and zinc 7 percent.

Nevertheless, analysts gathering in London for the annual LME Metals Seminar remained bullish on the outlook for the complex.

"Critically, metal inventories are at record lows, meaning that even modest differences in supply and demand can have a huge impact on one's opinion on price and even on price direction," said Barclays Capital analyst Ingrid Sternby.

"We remain positive on metal prices for at least the rest of the year and into the first quarter of next year, expecting fresh highs during this period," she said.

"We believe prices will be driven higher by increased consumer demand following the summer slowdown, and renewed investor buying due to technical momentum and growing confidence about the global outlook," she said.

Base metals were then expected to fall back from peak levels, but remain above historical averages, Sternby predicted.

Her view was echoed by Societe Generale analyst Stephen Briggs, who said base metal prices on the LME "will at the very least remain historically high well into next year, and further volatility is likely in the next few months."

"However, we do not believe that the cycle has been abolished and we expect prices generally to ease over the course of 2005," he added.

Briggs estimates base metals demand will grow by at least 6.5 percent this year, while 5.5 percent growth "is possible" next year.

Before last week's slump, lead prices had surged by 71 percent since the start of this year, shooting above the US$1,000 mark early this month for the first time in 24 years, as stocks declined to the lowest level since 1990 and investors piled into commodities.

The price of copper rose by 61 percent from levels at the start of the year to reach 3,178 dollars a tonne on Oct. 11, the highest level for 16 years. Copper inventories are approaching historic lows, with less than 100,000 tonnes of the metal available in LME warehouses.

"At the average rate of drawdown so far this year, this could be gone by mid-November," Sternby said. "The Western world market is seriously short of copper."

As for aluminum, its price was showing a rise of over 20 percent this year at its peak earlier this month, when it flirted with the symbolic US$2,000 per tonne mark.
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