By: Creamer Media Reporter

12th January 2010

Updated 53 minutes ago

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TORONTO (miningweekly.com) - Metal prices have likely bottomed out, and are expected to put in a strong performance this year, Swedish research group Raw Materials Group (RMG) said in its annual full-year forecast.

"A falling market has been replaced by a market with physical demand and likely strong speculation over prices," RMG said.

Prices will likely be volatile over the year, with a mean price below the current day level for most metals.

Since the bottom levels of 2009, prices have been driven by strong physical demand from China and the rest of Asia, combined with speculation from financial players.

"As the end consumption rate remains relatively low in relation to the period before the financial crisis, a situation has arisen where stockpiling and price rises are taking place simultaneously for most metals," RMG commented.

Beyond 2010, the group expects that activity levels in the mining industry will remain high.

"The key factors behind this are the fundamental situation with strong demand from the developing economies combined with an already challenging situation in creating new capacity at the mining stage.

"It will become increasingly difficult, partly because of financing problems in the wake of the financial crisis, in keeping up with demand for metals, suggesting that further price increases for metals are likely. "

BASE METALS

Although there were substantial cutbacks in the production of nickel and zinc by miners in late 2008 and early 2009, a lot of this capacity has since started coming back online.

However, the restarts have, to some extent, been a response to high metal prices rather than strong physical demand, and this could prove a challenge for the industry in 2010, RMG said.

Base metals are expected to see a price correction from the current prices during the first half of 2010.

"Closed mine capacity has been restarted following the price upturn during 2009 and stocks are growing as demand still has some way to go before it reaches 2006-2008 levels," RMG said.

"On a full-year basis, however, base metals will stabilise at a level 10-20% higher during 2010 than the average for 2009, although this represents a slight downturn from the current day prices."

GOLD

With regards to gold, which has risen strongly in recent years, RMG comments that the three key factors driving the price are "now history".

"The fall of the dollar looks to be over for now, the move to more secure investments during the financial crisis has come to a halt as a result of the return of risk appetite and the falling output of gold mines in 2009 has been reversed for the first year since 2001."

However, increasing interest from China and India in gold investments and the "haunting spectre" of inflation following the government's stimulus package could keep prices for the yellow metal high.

IRON ORE

Finally, RMG predicts that steel companies will find it difficult to negotiate reductions in iron-ore prices, despite current overproduction, because of the strong position of the three biggest producers - Vale, Rio Tinto and BHP Billiton.

"The lower freight prices also mean that domestic iron ore production in China will be unfavourable compared with imports from Brazil and Australia.

"The Chinese production is also taking place at ever-lower concentrations, which also suggests that ore imports are likely to increase and that the high price of iron ore will probably continue."

Edited by: Liezel H