nickel update 17

As commodities lose luster, S&P very positive on nickel and reasonably so on copper
By: Dorothy Kosich
Posted: '15-FEB-07 07:55' GMT © Mineweb 1997-2006



RENO, NV (Mineweb.com) -- While there is no question that “commodity prices have lost their luster,” Standard & Poor’s analysts suggested Wednesday that “the average price curves for the next five years should be meaningfully higher than they were for the prior five years ending 2004.”

In an analysis published Wednesday, S&P’s Ratings Services said they believe “the essential message is that healthy fundamentals should remain in place for at least the next couple of years, and will sustain prices at levels that offset rising costs and serve to maintain or even improve credit quality.”

“We expected the decline in the price of some base metals. The lofty perches they attained were not supported by underlying supply and demand fundamentals, but rather by speculation and unfounded exuberance among traders and commodity funds, which pushed prices well beyond forecast levels to historic highs,” said Primary Credit Analyst Thomas Watters.

“No question commodity prices have lost some of their luster,” Watters said. “However, there needs to be some weeding out of the speculative trading that has been occurring. Eventually, prices need to reflect cyclical macro-economic issues and supply/demand fundamentals.”

While copper has returned to earth from its record price of $4.075/lb last May, Watters said S&P remains positive on copper’s near- to-medium-term prospects. He noted that few large-scale copper projects are coming on stream over the next two years, while China’s economy should remain healthy.

“Also, much of the new production slated to come on line starting in 2008 will be in politically unstable countries, and long-term supply fundamentals may be buffered by the risks of operating in such challenging regions,” according to Watters. “Moreover, rising power, environmental, and labor costs, along with declining ore grades, could force higher cost producers to curtail production. We would be hard-pressed to imagine copper prices ever reaching 60-cents to 70-cents per pound territory anytime soon.”

While nickel recently soared to a lofty $17.15/lb, Standard & Poor’s believes this year’s outlook for nickel “remains highly favorable as London Metal Exchange inventories remain at about only day one of global production. Stainless steel production…remains strong, and fundamental supply constraints should limit downward pressure on nickel prices.”

S&P’s analysis also stressed that the higher capital costs and potential delays in achieving commercial production at three major nickel projects “should maintain the tight supply-demand balance in nickel through 2008