Base metals may surpass their heady levels a year after hitting record highs

Singapore: A year after hitting a record high, base metals may yet surpass their heady levels, but China's efforts to rein in demand and the prospect of rising supplies will prevent prices from holding on to gains.

Copper and aluminium hit all-time highs on May 11, 2006, propelled higher by a wall of fund money, but prices quickly tailed off and some market watchers called an end to a bull run that began in mid-2003 and that has seen prices rise more than five-fold.

In recent weeks, copper has recovered, gaining 60 per cent since early February, while nickel, lead and tin have all hit record peaks in the past two months.

Last Friday, copper hit an 11-month high of $8,335 a tonne on the London Metal Exchange, less than $500 short of its record, while aluminium spiked above $2,900 last week.

"Could we get back to the previous peaks? Quite possibly as copper is less than $1,000 away. Can we sustain a move above that peak? No," said Sempra Metals economist John Kemp.

Copper had the potential to spike to over $11,900 a tonne this year as European and US consumers were returning to the market while supply disruptions continue, Credit Suisse said.

A series of mine accidents, strikes and project delays have plagued the metals industry, pressuring already scarce supplies.

With stocks of copper in LME warehouses at 142,275 tonnes on Friday - about a third lower than in late January and enough to meet fewer than three days of world demand - the market is highly vulnerable to supply disruptions.

"Except for aluminium, metal inventories are very low and any shock to supply could spark new highs. Maybe $12,000 is a bit ambitious, but stranger things have happened," analyst Joel Crane at Deutsche Bank said.

In the nickel market, stocks at 4,698 tonnes are enough for one day's use, while zinc stocks are down almost 90 per cent at 87,420 tonnes from a peak in 2004.

"We forecast prices falling out to 2012, but metals will remain well above long-term averages. In addition, there is significant risk that the supply side will continue to disappoint as it has over the past four years," Crane added.

Kemp said base metals could be in the same situation as crude oil was 12 to 18 months ago, characterised by historically high prices but sufficient supply to maintain a contango market - where nearby prices trade at a discount to futures contracts.

"Crude prices have stagnated over the past year after hitting record highs. Base metals are probably trailing crude oil by 12 to 18 months in terms of price development and investor appetite," he said.

"The question is now whether we are at the same stage in metals as we were in crude in the second quarter of 2006 when prices peaked, or are we further behind."

Strong metal prices have sent shares in mining firms like BHP Billiton soaring to record levels and has also prompted a series of mergers and takeovers in copper, nickel, aluminium and zinc.

Most recently, Alcoa Inc, the world's largest aluminium seller, launched a hostile takeover bid for smaller rival Alcan.

Downside risks

Analysts said efforts to slow growth in the world's largest metals consumer, China, and rising supply would eventually deflate metal prices.

"I am in the camp that does not expect to see substantial moves past the previous peaks," Australia and New Zealand Bank analyst Andrew Harrington said.

"There is a more serious effort to slow the rate of growth in China where before the concern was to ensure that the economic miracle didn't falter."

China's higher reserve requirements, rising interest rates and looser currency bands so the yuan can appreciate more quickly, signalled that Beijing was stepping up efforts to cool its overheated economy.

And on the supply side, although supplies of copper concentrate - compounds of copper that are smelted and refined into metal - were still tight, that would ease as new mines are being developed.

BNP Paribas analyst David Thurtell said mine output should grow in excess of six per cent in 2007 and in 2008 after contracting in 2006.

The Lisbon-based International Copper Study Group expects mine capacity to grow at an average rate of 4.6 per cent per year to reach 21.2 million tonnes in 2011, up by about 4.2 million tonnes from 2006.

The industry body added that refined copper capacity was expected to reach 24.4 million tonnes by 2011, up 18 per cent from 2006.

All-time highs

Copper $8,800 May 11, 2006

Aluminium $3,310 May 11, 2006

Zinc $4,580 Nov 2006 (matched Nov 27)

Tin* $15,100 Apr 18, 2007

Lead $2,140 May 8, 2007

Nickel $51,800 May 9, 2007

* Contract high.

** Prior to October 1985, tin was denominated in sterling and touched a record £10,295 a tonne in February 1985.