The strength of Chinese industrial metals demand, coupled with declining exports, bodes well for a bounce back in base metal prices. Lead, tin and zinc have greatest upside potential.
Author: Dorothy Kosich
Posted: Monday , 27 Aug 2007

RENO, NV - In a recently published forecast, Barclays Capital predicted that the strength of Chinese industrial metals demand, coupled with declining exports, "provide a firm underpinning" for a bounce-back in base metals prices "once the dust from subprime settles."
Meanwhile, Barclays commodities analysts predicted that gold demand will remain positive over this year as "continued dollar weakness and oil price strength, couple with a tense geopolitical environment, remain favorable for gold."
Nevertheless some bearish factors remain including the sharp slowdown of dehedging for the second half of this year, while the estimated shortfall of European central bank selling is not anticipated to be as large. "Thus the gold price is in need of a new catalyst to reinvigorate its challenge toward higher levels," declared UK-based analysts Kevin Norrish, Sudakshina Unnikrishnan, Costanza Jacazio, Suki Cooper, and Gayle Barry, and New York-based George Hopley.
In their recently published commodity strategy, the analysts stated that "for short-term directional trading, we see zinc, tin and lead as the base metals with the upside potential." However, they added, nickel has the clearest downside risk. "Copper and aluminum are weighed down by soft summer demand and some hefty LME inventory increases."

"Nearby price spreads have softened across the whole complex and curve flattening trades have worked well recently, particularly in aluminum, but also in nickel and tin," they noted, adding that "in copper in particular we think nearby spreads could tighten again."
Meanwhile, the analysts said that lead fundamentals are strong "with significant fundamental losses hampering supply growth and the downtrend in LME stocks accelerating. Meanwhile, zinc market supplies still support a potential sharp spike higher in our view."
"Aluminum market fundamentals are not inspiring and we expect range trading to continue and for the forward curve to continue flattening," according to Barclays. "Tin fundamentals still look like undergoing further tightening and after recent price falls there is a significant price upside. Lastly, stainless steel destocking has weakened the nickel market, boosting LME nickels stocks, and we expect further downside risk to prices before the potential for a price recovery emerges later in Q4."
Barclays's research revealed that no waning exists in China's appetite for industrial metals, whose prices "have borne the brunt of recent gyrations in the wider financial markets. Though short-term price volatility is likely to remain high while these concerns continue to linger over the market, recent base metals trade data for China provide reassurance that fundamentals trends are still firm."
"While movements in wider financial markets will remain a key factor in setting investor sentiment towards the complex, the strength in China's industrial metals demand and its flagging export levels in several key sectors provide a firm underpinning for a bounce-back in base metals prices, once the dust from subprime settles," the analysts concluded.