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BASE METALS. What copper bubble?
[April 20, 2007]

BASE METALS. What copper bubble?


(Financial Mail Via Thomson Dialog NewsEdge) BASE METALS What copper bubble? WHAT IT MEANS In six months the outlook has changed dramatically, and ratings reflect this Analysts have now learned not to talk down metals like copper and nickel In a replay of the first few months of last year, base metal prices have risen sharply, despite initial bearish forecasts and pessimism on global economic growth prospects.



The world economy is doing better than expected, while the China/India growth story continues, albeit at a slower pace than the red-hot performance experienced during 2006. According to the April 2007 World Economic Outlook just released by the International Monetary Fund (IMF), notwithstanding recent financial market nervousness, the global economy remains on track for continued robust growth in 2007 and 2008, though at a somewhat more moderate pace than in 2006.

The IMF report adds that the downside risk to the outlook seems less threatening than it did at the time of its September 2006 report.


That's very different from the view prevailing in December/January, and the turnaround is illustrated by the movement in the copper price since then. The Merrill Lynch commodity review of December 8 advised investors to go underweight on metals except for gold and platinum group metals (PGM) and take profits on select stocks.

According to Merrill Lynch then, the metal with the worst prospects was copper. The firm downgraded its investment recommendation on BHP Billiton a major copper producer to neutral. The share was then around R136.

Merrill Lynch forecast an average copper price for 2007 of US$2,40/lb, down 30% from the 2006 average price of $3,40. The firm said it was cautious in the medium- to longer-term outlook.

Merrill Lynch was being polite. In early January, US markets commentator Peter Grandich said fair value for copper was between US65c/lb and 85c/lb. He felt the price could still go below $2/lb from the then market level of $2,55/lb, though he did cover his bets.

Grandich conceded there might be a counter-trend recovery to as high as $3/lb, but that would be a selling opportunity as the hot air in the copper bubble is all but gone.

Now the copper price is back at $3,58/lb on Nymex $7800/t on the LME and climbing, while the BHP Billiton share price has set a series of record highs, reaching R168 on April 11.

Market commentators are now reviewing their 2007 metal price forecasts, though Merrill Lynch is sticking to its guns on copper and has dropped its average expected price to $2,35/lb.

The firm says the price strength of the past few weeks is a dead cat bounce, adding: We believe there is still too much hype and speculation in the traded base metals. We would prefer exposure to the longer-duration contracted commodities such as iron ore and coal, as well as uranium, platinum and gold. Grandich says he's waiting to pull the trigger on shorting the copper market, but again he covers his bets, adding that the metal could go back to $4/lb in other words, match last year's highs.

That is some dead cat bounce but Merrill Lynch reckons copper is oversupplied in 2007 on even conservative production outlooks.

This view puts it at odds with Deutsche Bank, which has raised its copper price forecast for 2007 by 6% to $2,86/lb, because increased Chinese consumption and continuing supply constraints are expected to help neutralise the impact of weak US consumption.

At the end of March, London broking firm Numis Securities raised its forecast copper price for 2007 to $2,50/lb from $2,20/lb previously, because of continuing strong Chinese industrial and economic growth. Numis pointed out that copper imports to China rose by 70% year-on-year in January and February.

The unrivalled base metals success story is nickel, because of booming demand for stainless steel. Nickel and chrome are what put the stainless in stainless steel, and nickel has hit near record prices of $23/lb on Nymex and $49900/t on the LME.

Deutsche has just upped its nickel price forecast by 23% to $17,59/lb for 2007, Merrill Lynch by 29% to $13,88/lb.

But metal markets are not for sissies and it could still end in tears if Merrill Lynch's pessimistic short-term prediction on nickel proves correct. The firm says: Nickel remains our best metal on fundamentals on a long-term view. However, the short term looks hard due to pending stainless steel destock (selling down stock). The firm expects that a stainless steel destock could see nickel prices fall by 30%-40% during the second and third quarters.

Meanwhile, nickel-linked shares are soaring, such as AIM-listed Ridge Mining, which has doubled to 129p in the last month. Ridge's proposed Sheba Ridge project in Mpumalanga will be a large nickel producer.

Copyright 2007 Times Media Ltd.. Source: Financial Times Information Limited.

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