The Trading Floor

[Arctec]

Commodity relief in sight
By: Barry Sergeant
Posted: '24-JAN-07 15:00' GMT © Mineweb 1997-2006



JOHANNESBURG (Mineweb.com) --In a report to clients, Dresdner Kleinwort reckons that metal prices may continue to decline, having already retraced 15% from peaks seen in May 2006. The main reasons for potential forward weakness are cited as increasing supply, a slowing US economy, and an increase in inventories.

Increasing supply is seen as the main culprit, given the commodities bull market that has been in place since early 2002. Exploration expenditure, which all but came to a halt in the late 1990s, has exploded in the past few years, and, to boot, many old mothballed mines have been restarted. Lots of scrap, also, is not looking like scrap anymore.

The flipside is that the global economy can look forward to substantial relief, on the back of lower commodity prices. The Bank Credit Analyst reckons that the world’s crude oil bill, alone, will fall by over $400bn this year if crude oil prices average $50 a barrel, levels seen of late, after trades of close to $80 a barrel last year. Consumers will welcome the relief, and equity investors need to react in an appropriate manner.

BCA Research states that global expenditure on crude oil was $2 trillion last year, equal to about 4.2% of global GDP (gross domestic product). Based on current crude oil prices, global crude oil expenditure is set to decline to just over 3% of GDP this year. While that is still high compared with the average of the past 20 years, says BCA Research, the decline would be the largest since crude oil prices plunged in 1986.

Analysts at UBS, among a number of others, have reduced crude oil price estimates for 2007, not least on the unwinding of producer hedges and other financial trading. The West Texas Intermediate (WTI) crude oil price estimate for 2007 has been reduced from $69 to $60 a barrel

But few analysts reckon that global crude oil outlays will fall to as little as 3% of world GDP in 2007. Given that leading indicators are pointing to a re-acceleration of global growth in the second half of this year, and with global oil supply capacity still constrained, BCA Research forecasts that crude prices will trend higher later this year. UBS has, indeed, raised its forecasts from $62 to $64 a barrel for 2008, and introduced a forecast of $62 a barrel for 2009.

Crude oil prices grab headlines, but Dresdner Kleinwort anticipates that the general metals complex will also witness cooling prices going forward. Analysts argue that demand from China can, at best, prevent the decline in metals prices from turning into a “bust”.

The value of the dollar will continue to play a crucial role. On Tuesday this week, gold bullion prices hopped on a weaker dollar and silver rose to its best level in more than a month. Speculators also clawed into other commodities and metals, not least platinum and palladium, on firm fundamentals. While markets have been described as “constructive” of late, with adequate fund interest still very much there within the metals complex, even speculators are well aware of the dangers.

In the past few days, aluminium, tin, nickel and lead have continued to attract fund buying, posting new highs across the board. But as one metals trader puts it: “It remains to be seen whether the minor metals can hold on to these lofty gains and caution should be the name of the game as even a small correction could send them into a nasty downside spiral”.