Base Metal Prices May be at a Turning Point

Implications: Base metal prices have been somewhat bearish as of late as have other commodity prices such as oil and gas.  Speculators often react and overreact to daily news items forcing large swings in commodity pricing. However the greatest real effect on commodity prices will be whether Chinese buyers come back strong following the Olympics in August.

Analysis: Base Metal Prices May be at a Turning Point  

Base metal prices have been somewhat bearish as of late as have other commodity prices such as oil and gas. While the US economy has been hurt by the weak dollar, financial institution crises, increase in unemployment, and building slowdowns, the gross national product (GNP) has been steady to even slightly higher. This week, some economic advisors have predicted the world economy will slow down to the same pace as that of the US.  

Speculators often react and overreact to daily news items forcing large swings in commodity pricing. However the greatest real effect on commodity prices will be whether Chinese buyers come back strong following the Olympics in August. Even the lowest prediction for Chinese growth is still at greater than 10% which means Chinese mills will continue to need raw materials, i.e. scrap metal, to keep up with their growth rate. China has been very quiet for the last two months on the buying side but with the commodity prices falling back to more relatively affordable levels the odds are increasing they will begin placing orders which will once again put upward pressure on the scrap prices, and in turn the new metal prices. There remains a possibility that the Chinese mills do not enter the world market as they continue their focus on rehabilitating and restoring damaged infrastructure caused by the earthquake earlier this year. But even here they will need replacement materials which would likely be produced by their own mills.  

If the Chinese mills rev up their production rate once again, there is room for an increase in base metal pricing of 10% (aluminum, copper, iron) to 25% (nickel, zinc) to prices in effect in the first quarter of this year. Typically mill buyers allow lead time of two to four weeks for delivery, so if they intend to begin melting after the Olympics, the orders should begin within the first half of August.