Last Wednesday, copper stocks on the benchmark London Metal Exchange stood at 517,175 tonne, up almost 52% from the same period last year, while nickel inventories were almost double at 159,000 tonne.
Similarly, stocks of zinc, aluminium, lead and tin were all at their multi-month highs, a fact that would remind investors that despite the current bull run in metals, all are yet not buying into the story.
Recently, three-month copper futures on the London Metal Exchange (LME) touched a 15-month high. Aluminium and tin also hit multi-month highs on the back of strong fund flows and hopes of a faster recovery in global economies.
Most market watchers and analysts believe that the current bull run in base metals and crude oil will be sustained through 2010. However, sceptics feel the rally is running out of steam and is based purely on speculative interest from hedge funds that have shifted focus from currencies to crude because of the dollar?s sustained weakness.
Nevertheless, the general consensus seems to be that in a span of six months to a year, the prices of most base metals and crude will scale up further, and those spikes could be faster and higher than earlier because it will be backed by strong fundamentals.
?Looking ahead into 2010, the prices of many commodities are likely to increase further. Demand should generally be the main source of upward pressure, as global activity is widely expected to expand at a faster pace,? said Sunil Kewalramani, CEO of Global Money Investors. Kewalramani is not wide off the mark. Three-month March copper futures, which were at $7,337 a tonne last Tuesday, have an upside target of around $8,500 a tonne.
?We feel that in the short term, there might some correction in base metal prices because of monetary policy tightening, wariness over the US job market, supply issues at mines, and the weak dollar. But that pullback should provide buyers with fresh impetus,? said Anand James, senior analyst at Geojit Comtrade Ltd, a commodities brokerage firm. Analysts feel that three-month lead futures on the LME, which were trading at around $2,400 a tonne, could rise to $2,800 a tonne in the medium term. Three-month aluminium futures should test $2,350 a tonne. On Wednesday, aluminium on the exchange was trading at around $2,254 a tonne.
Similarly, zinc, nickel and tin all look bullish in the medium to long term. ?The upside target for zinc futures is $2,800 a tonne, while that for nickel is around $19,000-20,000 a tonne,? said James, adding that tin futures could reach around $19,000 a tonne. ?Tin has a greater chance of reaching the upside faster than other metals because it is mostly for industrial use and has more fund interest than retail demand,? he said.
Usually, after a prolonged period of economic recession, commodity prices take time to recover. What has baffled most analysts is that this time, it is the reverse: commodities staged a comeback much faster and firmer.
?As for the prices of the most risky assets, the initial impetus came from the perception that the worst of the global recession was over and that wide-ranging public intervention had succeeded in lowering uncertainty and systemic risk in the financial sector. Against this backdrop of an expected improvement in near-term outlook, commodity markets benefited from the increased incentive to hold inventories,? said Kewalramani.
At the same time, improving financial conditions provided increased credit availability for inventory financing at more normal costs while rising inflows to commodity funds likely facilitated the hedging of inventory positions, easing downward pressure on spot market prices, he added.
The Chinese appetite for metals is another fascinating story, which is expected to nudge prices upwards. Experts believe that as stimulus spending in the world?s fastest-growing major economy propels economic growth, metal demand will increase. ?As China?s stimulus spending continues unabated, upward pressure on commodity prices is expected to continue in 2010. Small attempts to tighten monetary policy in China will have only a temporary negative effect,? said Kewalramani.
Sceptics, on the other hand, believe that rising stocks and an unclear view of the global economic recovery would prevent any sharp spike. ?Moreover, the greenback will recover sooner or later, which could push metal prices down,? said James, adding that he expected the dollar to reach 80-80.4 against a basket of major currencies, against the current level of 77.
Moreover, swelling stocks of most base metals is also expected to dampen prices (see chart). ?Such high stocks will continue to exert pressure on metal prices, hence a very sharp rally should not be expected,? said another analyst, who declined to be named.
?It?s basically fund play that is driving commodities. Last year it was oil, then they shifted to gold and now they are looking at base metals,? Kewalramani said, adding that in the case of oil, too, a sharp spike looks unlikely as processed crude is lying at various ports around the world, which will cap any surge. According to unofficial estimates, world crude oil stocks are at around 327.3 million barrel, which is more than the upper limit of last year?s average stocks.
Whatever be the reason, metal prices are poised to enter an exiting phase, marked by a slight correction in the near term, followed by a long bullish phase. As James points out, all the high stocks will vanish when China starts purchasing in full steam.
