Full metal jacket
How will the market remember 2007?
SKED A YEAR AGO whether strong metal prices could be sustained, an industry executive reckoned the world was in “the third or fourth innings” of a resources bull market.
That was a deliciously ambiguous assessment. North Americans know baseball has nine innings, which would make us about mid-way through this up-cycle. But large parts of the rest of the world know that in cricket there are only two innings. That suggests either a period of high metal prices is now over or experiencing never-seen-before terminal correction.
As it happens, the ambiguity is a fair survey of opinion on the matter. Some analysts think the world has seen the best of this cycle’s metal prices; others believe there’s more to come.
Quoted by Bloomberg News, Deutsche Securities gave possibly the best representative view of the optimism. It thought commodities’ prices were undergoing “a recurrent correction in a continuing bull run”. Prices could stay high for an extended period, the group said in a 12 January report.
Compare that to the view of Dutch bank ABN Amro: “We’re witnessing the definitive end of the commodity price boom that began late in 2001. Prepare for a down year for commodities as markets move towards increasing supply surplus.”
The Reuters/Jefferies CRB index of 19 commodities has fallen 9,6% since endNovember, Bloomberg reported.
On 8 January, miningmx published comments by Merrill Lynch, including: “We do continue to believe in the super cycle: that metals prices will be stronger for longer. However, this means stronger than long-term average prices, not stronger than current spot prices.”
Perhaps Merrill Lynch’s view represents the happy medium and, ultimately, what has always been true. Some metal prices will go up, some will go down. But which? And what of the share prices of companies that produce the metals: how will they fare?
Some metals are easier to understand than others. The uranium price is estimated by Australian group Resource Capital Research to continue moving upwards in 2007, possibly to US$100/lb. And the share prices of companies that produce it are also likely to improve.
But the matter is less clear in the everopaque gold market. In the London Bullion Market Association’s forecasting competition last year, only one analyst dared bet (correctly) on a gold price average higher than $600/oz. Knowing the perverse nature of the gold market, wildly optimistic forecasts of $650/oz may go punished. Standard & Chartered Bank has gone for $613/oz, while JP Morgan has forecast an average of $678/oz.
Tolerance of higher platinum prices would appear to underpin the white metal’s price at $1 000/oz or higher. Certainly expectations of growing demand are behind the hundreds of millions of US dollars being pumped into SA’s platinum exploration market.
Base metals are harder to understand. Copper at below $6 000/t is well off its May 2006 high; and even Deutsche Bank has cut its average price by 10% for 2007. But the price of nickel rose in early January, posting its biggest two-day gain in more than five years on speculation that stockpiles won’t be sufficient to meet demand. Inventories have fallen 82% over the past 12 months, reported Bloomberg News.