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duration of the resources cycle to be extended Resources Cycle Seen Turning Past 2009
December 12 2005 - Australasian Investment Review

It is the view of Smith Barney Citigroup that the outlook for commodity prices remains defined by one’s investment time frame, with volatility likely to cap short-term performance but the longer-term outlook remains positive.

As a result the broker has lifted its long-term price forecasts for most resources out to 2009, as it now expects the duration of the cycle to be extended.

Among the metals the broker continues to favour exposure to aluminium and zinc, while it is now also more positive on the likely pricing outcome of the current iron ore contract negotiations.

The only bad news for investors is the broker’s decision to lower its forecasts for semi-soft and thermal coal, though it notes its coking coal forecasts assume 2005 prices are rolled-over in the current negotiations.

Focusing on the short-term, the broker has pushed out its expected correction in copper prices to the first quarter next year, as by then it expects the current short squeeze and short-term production bottlenecks to have been resolved.

Despite the likely correction the broker has revised up its full year copper price forecast for 2006 by 20% to US137.5c/lb, though this is down from its expected average of US166.2c/lb this year.

In the broker’s view the extent of any correction in copper prices will be important given its status as the "bellweather" metal, so if the correction is more pronounced than expected it could have an impact on the amount of hot money flowing into the sector.

Similar positive revisions have been made for both zinc and aluminium for 2006, the forecast for the former increasing by 15% to US68.8c/lb and the latter by 12% to US95c/lb.

While prices for both metals have also been revised up in 2007 by 18% and 8% respectively, the increases are
not enough to change the broker’s view both metals will have average prices in 2007 lower than forecast for
2006.

Nickel’s position as one of the broker’s least preferred metals is supported by its price forecasts, with its 2005 average of US$6.68/lb expected to fall to US$5.13/lb in 2006 and US$4.50/lb in 2007.

While the broker’s forecasts for alumina and lead have also been increased in 2006, both metals are expected to have lower average prices next year than they achieved this year.

With negotiations upcoming for iron ore prices the broker now expects an increase of 20% in 2006 compared to its previous forecast of a rollover in pricing. The broker has also lifted its 2007 estimate, now forecasting a further 10% increase in contract prices for that year.