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Commodities collapse tipped

The wall of worry will make base metal prices a volitile situation.

http://www.theaustralian.news.com.au/story/0,20867,18995710-643,00.html

Commodities collapse tipped
Andrew Trounson

May 02, 2006
COMMODITY prices were likely to peak this year and were primed for a fall of up to 50 per cent, analysts warned yesterday as resource stocks again jumped sharply higher.
The gold price hit a 25-year high at $US661.10 an ounce, sparking fresh buying of mining stocks, despite a warning from Canberra-based Access Economics that metal prices are poised to start dropping steeply from the end of the year.

Gold shot up on the back of growing fears over the nuclear standoff between the US and Iran, and expectations that US rates are on hold.

The local stock market was led higher by resource and gold stocks, the All Ordinaries finishing 48.2 points higher at 5255.2. The Australian dollar rose nearly half a cent to US75.95c, its highest close since October.

However, this year will be as good as it gets in metal markets, according to Access's latest quarterly survey of 10 forecasters. Booming copper prices are forecast to fall about 50 per cent over the next two years, with other base metals to fall 30-40 per cent. Gold is forecast to be averaging $US564 an ounce a year from now. So far this year copper is up about 60 per cent and zinc close to 70 per cent. At the same time, there are warnings the soaring metals prices could reduce demand as consumers turn to cheaper substitutes, such as plastic for copper tubing.

Access said it was slightly more pessimistic on the outlook for prices than the forecasters, noting that despite strong demand from China and in the future India, new mine supply is set to catch up with the market. "Access Economics are price pessimists for the medium and longer term. China's demand growth is here to stay, as will India's to follow ... but price will ultimately be determined not by demand, but by supply costs and sustainable margins."

Analysts have been forecasting an imminent pullback in prices for months only for prices to break new highs as new mine output ramps up only slowly, and investment funds increasingly buy into metals. And as prices rise, forecasters are continuing to hike their long-term price projections in a sign that a cyclical pullback will be shallower than previous cycles. Access said analysts had raised their long-term prices by an average 6 per cent during the last three months. Goldman Sachs JB Were recently warned that metal demand could be threatened by high prices as consumers turned to substitutes. It estimates that as much as 20 per cent of world copper demand could be threatened by substitution if prices continued to rise for an extended period. It noted plastic was being increasingly substituted for copper in pipes, while the use of copper wire in electricity transformers could be threatened by aluminium.

"Unofficially, we understand that at least one major industry association now considers plumbing tube to be a lost market for copper," GSJBW said, noting that last year the European and North American plumbing copper tube markets fell by 75,000 tonnes in favour of plastics.