London 11/10/2010 - The global economy will not face a double-dip and strong metals prices are likely to persist, particularly for copper, tin and lead, Robin Bhar, Senior Metals Analyst at Credit Agricole, said on Monday.
Investors have every reason to be optimistic about base metals as the dollar deteriorates with quantitative easing on hand, and better supply/demand fundamentals will also lift prices.
Credit Agricole predicts copper will climb to $9,000, tin will trade at $25,000 and lead will advance to $2,544 by the end of 2011 as real (end-use) demand is improving, inventories have levelled off and speculators are now long base metals on expectations of looser monetary policy.
“It appears to be a case of not if - but when - the Fed embarks on further quantitative easing,” Bhar said.
Interest rates in the US are unlikely to rise and cheap money will continue to pour into the metals sector, as “slow jobs growth, excess capacity and benign inflation will lead the Fed to maintain easy policy for a prolonged period,” Bhar said.
The rapid growth of physically-backed ETF’s could tighten metal availability further, pushing up premiums and prices, according to Bhar. ETF’s are cheaper than commodity derivatives, useful for those looking for short-term exposure and give investors exposure without the risk of margin calls.
SUPPLY CURBED BY "WALL OF DEBT"
Future supply growth will probably be capped by dramatically lower investment as the world picks itself up from the worst of the recession.
“The world’s largest listed mining and metals companies are burdened with a ‘wall of debt’ that is having a severe impact on future supply growth,” Bhar said.
Furthermore, there have been few major discoveries in the past ten years, and structural under-investment in mine capacity afflicted the metals industry – especially for copper, zinc tin and lead - even before the credit crisis.
NO RUSH TO REVALUE
On the demand side, however, China is currently the only robust growth area for consumption, according to Bhar.
But foreign exchange moves are a “wild card,” as analysts are divided as to whether the Chinese will move quickly – if at all – to revalue their currency. An appreciating CNY (Renminbi, RMB or yuan) is positive for commodities where China is the marginal supplier as it leads to a steepening of the cost curve in US dollar terms, and therefore higher long-run prices.
A revaluation would most significantly impact the aluminium market, as China accounts for 40 percent of global capacity, but would also affect the market for iron ore, thermal and coking coal, zinc, and nickel pig iron, as these commodities are currently trading above marginal production costs.
However, Bhar – along with most analysts – doubts that any Chinese currency movement will be rapid.