Base metals in 2008: only copper and aluminum to shine says UBS

Overall, 2007 has been a good year for commodities. However, base metals have performed weakly, with lead virtually the lone star performer. For 2008, Andreas Hoefert Analyst, UBS Financial Services expects base metal prices to consolidate further.

However, Hoefert remains optimistic at least for copper and aluminum, which he thinks could outperform the metal complex. Talk of a possible recession in the US, the world’s second largest copper consumer, is currently taking center stage amongst market pundits, and this has been a prime factor in the recent plunge in the red metal’s price. Mitigating this, demand from China, the world’s largest consumer, continues to be strong. Chinese imports of refined copper during the first 10 months in 2007 have surged 92% to 1.3 million tons. The International Copper Study Group estimates copper usage in China increased 23% year-on-year in 2007, while an increase of 6% is expected in 2008.

Copper also continues to remain vulnerable to production outages, particularly due to labor unrest. The ongoing strike that started on July 30 at Grupo Mexico’s Cananea mine may see the company’s output drop by 10% this year. The strike has become mired in a complex legal dispute, which could well continue into 2008.

Beside copper, aluminum could be an outperformer amongst base metals. Here again, the China factor is of key importance. “We think the world’s largest producer and consumer may turn into a net importer due to the imposition of export taxes to rein in its rapidly expanding economy.”

Moreover, China’s National Development and Reform Commission issued a warning on the excess allocation of capital resources into the base metals industry, especially aluminum, and the wasteful use of energy in this sector. “We think this may be a precursor to increased efforts aimed at resource conservation and elimination of small producers, which would prove supportive for prices in the long term.”

While UBS expect zinc, lead, tin, and especially nickel prices to fall due to high inventories and further mines opening in Australia and New Caledonia, both copper, with a +7% price increase forecasted in 2008 from the current levels, and aluminum (+3%) should hold their ground.