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Base metals are more precious by the week
Why are tin, copper, lead, zinc, aluminium and nickel so expensive at the moment and is the general base metals rally sustainable?

By Garry White
Published: 6:18AM BST 11 Oct 2010

With regards to copper, the industry expects it to hit a record high of $9,000 per tonne

An increase in the need for metals used in heavy industry is one of the first indications of a return to healthy growth, but is it more complicated than this?

Last week's frantic trading in base metals is likely to make the industry's global players reluctant to abandon desks for their annual gathering in London on Monday

Those who do make it are expected to have one main topic of conversation: why are tin, copper, lead, zinc, aluminium and nickel so expensive at the moment and is the general base metals rally sustainable?

Tin is at a record high, reaching $26,780 a tonne on Friday – or a 5.3pc gain over the week - and copper hit a two-year peak of $8,310 a tonne, up 3pc over the past seven days. Aluminium and nickel are also trading at five-month highs.

Some argue that the world is seeing the signs of an emergence from recession. An increase in the need for metals used in heavy industry is one of the first indications of a return to healthy growth.

But the picture appears more complicated than this. One of the most obvious drivers of the recent surge is the weak dollar, making the metals traded in the greenback cheaper for those trading in stronger currencies.

And it's not just base metals. Investors are throwing money into commodities for fear that further quantitative easing will lead to currency devaluation and rampant inflation.

This pushed the benchmark Reuters-Jefferies commodities index up 2.5pc on Friday alone and just over 3pc for the whole week.
There are more reasons why base metals are benefiting in particular. Brokers from Sucden Financial, a company active on the London Metals Exchange, said there were tight supply fundamentals underpinning macro-economic motives for the rally.

Mining companies scaled back investment in new projects during the recession and this under-investment will hit the availability of base metals for some time to come, argues Steve Hardcastle, head of industrial commodities at Sucden.

In the case of tin, there are also specific production problems in Indonesia, with heavy rains and shuttered mines causing a shortfall. Overall global production will only be 1.5pc higher this year than in 2009, despite strongly rebounding demand from Asian countries.

Meanwhile in copper, the industry expects it to hit a record high of $9,000 per tonne, on concerns that next year will bring a shortage of copper concentrate, a crucial pre-product. According to a new report from Goldman Sachs this week: "Even relatively conservative demand forecasts suggest that the global copper market will sustain deficits large enough to mostly deplete exchange inventories over the next five quarters, leading to periods of extreme volatility and price spikes."

It looks like nickel could be the next candidate for a record. A shortfall of 7,500 tonnes in the first half of 2009 has ballooned to a 51,500 tonne deficit this year.