Full metal jacket

How will the mar­ket re­mem­ber 2007?

Finweek English Edition - - Focus on mining indaba -

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.

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