Base metals are more precious by the week

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

Related Articles

• • Investors see silver lining in economic gloom

  • Gold jumps to record high on fresh economic concerns

  • Vedanta Resources hit by Indian copper mine closure

  • Miners buoyed by bullish outlook, lift FTSE 100

  • Will copper outshine gold and silver?

  • A 'Copper Standard' for the world's currency system?

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.

This is only likely to get worse when the effects of cyclical, long-term, under-investment start to kick in.

Nick Moore, an analyst at RBS, believes the real crunch won't come for several years. "Optimism peaked in mid-April, after which a sharp price relapse saw base and precious metals, iron ore and crude oil tumble 20pc-30pc to end-June," he explains. "Since then, base and precious metal prices have snapped back. For base metals, we have been impressed by the scale of inventory erosion during 2010, notably for bellwether metal copper.

"The emergence of deep inventory draining supply shortfalls post 2012 will likely herald the return of acute pricing tension for base metals in the 2013-14 period. Before then, much of the production capacity idled is now comfortably profitable on a cash cost basis and producers - notably nickel - are itching to reactivate."

His comments are backed by the International Monetary Fund, which warned last Wednesday that the squeeze is likely to continue.

According to the World Economic Outlook, investors should note that: "The medium-term balance of risks for prices should remain tilted toward the upside, particularly for copper."

However, analysts from Commerzbank believe the very recent price rises have been too strong and too soon. With the spike driven by the fervour of financial investors, the fundamentals may not be good enough to justify the enormous boost seen in the markets lately.

"As a rising tide lifts all boats, even those metals with virtually no fundamental basis for price gains will be pulled along, as is the case with zinc and lead," their latest note says.

"Too much optimism is not advisable. Even if the sharp rise in metal prices is partly justifiable in fundamental terms, this has happened in a very short period of time and at a rapid pace. Furthermore, it was driven to quite an extent by short-term oriented financial investors. In our view, high correction potential has now built up."

Brazil turns more sugar into electricity

Producing electricity from sugar has worked so well that Brazil's Petrobras has ordered another turbine to be converted at a plant north west of Rio de Janiero.

US engineering giant GE received a contract last week to adapt a second unit at a power plant outside the city of Juiz de Fora into a dual-fuel operation that can generate electricity from sugar cane-based ethanol or natural gas.

GE and Petrobras have completed five months of demonstration runs using the first turbine, which "validated the use of ethanol as an alternative fuel, as well as ensuring that emissions are within the expected limits", GE said.

Palladium hits nine-year high

The palladium price climbed to its highest level since 2001 last week on renewed investor demand.

The precious metal, which is principally used in catalytic converters, was boosted by investors seeking a safe haven from currencies, as fears over more quantitative easing grow.

Russian stockpiles are being drawn down and Norilsk Nickel, the world largest producer, said state-owned stocks will be finished next year.