Summary
At this stage in most previous commodity price cycles, the fundamentals would be coming under pressure as demand began to slow as the supply response to the high base metal prices began to emerge.
However despite record nominal prices in many cases, there is little evidence of a deterioration in the market balance.
As such, the price performance in this cycle is going to be very different to what has gone on before.
Analysis
The swift recovery of the base metals from their June correction reinforces the strong underlying market fundamentals. We expect that that many of the factors that have supported base metal prices so far this year remain in place:
Supply side tightness/disruptions – mostly notably Escondida (copper) and PT Antam and Minara Resources (nickel). There is no reason to believe that supply disruptions will not remain a feature in the coming months
US growth is filtering to a strong rebound in base metal demand
The revival in the EU and Japan is leading to a sharp recovery in base metal consumption
In China, more of the same (i.e. strong GDP/IP and base metal demand growth) – attempts to rein in the surge in fixed asset investment should not derail this growth
Strong growth in Indian and the ASEAN nations
Dollar weakness – the rebound in the dollar on the back of the prospects for higher interest rates will be short-lived given the more fundamental twin deficit problem
LME inventories remaining at critically low levels
Undiminished enthusiasm of the investment fund fraternity – funds appear to see a 10-25% correction as a buying opportunity rather than as a harbinger of doom.
