briefly ..and i think bottomed, page-2

re: briefly ..metals analysis Metals take a beating, but some still see life


By James Regan - ANALYSIS

SYDNEY (Reuters) - World metal markets may be smarting after some dramatic losses but not everyone is ready to call an end to the heady buying that earlier swept bullion to a 26-year high of around $730 an ounce and copper to a record $8,800 a tonne this month.

Hedge funds active in gold trading have used a recent rebound in the U.S. dollar and weaker oil prices to take profits, locking in gains of more than $150 an ounce since mid-March, according to David Thurtell, a strategist for Commonwealth Bank of Australia.

Gold has recoiled more than 10 percent since mid-May, while copper and zinc are down about 17 percent.

"Fund profit-taking at last seems to be gaining momentum and this has the potential to see prices fall significantly further," analyst William Adams of BaseMetals.com said in a report.

But some analysts believe the recent correction -- including a near 7 percent decline in copper on Friday -- is healthy and unlikely lead to a price collapse because of real demand for a variety of commodities.

"Most likely markets are returning to rational exuberance, with robust global growth, particularly in the Asian region, to underpin commodity prices over the next few years and possibly beyond," said National Australia Bank analyst Robert Henderson.

Spot gold currently sells for $640 an ounce , which is $223 higher than a year ago and copper costs $7,255 a tonne , a one-year gain of around $4,000.

Zinc, aluminum and lead prices are also substantially higher than a year ago.

"We see a bright outlook over the coming years for demand for metals," said Dedi Aditya Sumanagara, president director of Indonesia's PT Aneka Tambang Tbk , which is helping build an alumina plant costing $220 million and is boosting its output of nickel to meet demand.

INFLATION FEAR BLAMED

Analysts blame looming inflation, which threatens to cut into global economic growth, for the massive sell-off in base metals.

In Monday's trading, Shanghai copper and aluminum futures plunged to their daily lower limits, mirroring earlier declines in Comex and London Metal Exchange contracts.

"Some hot sectors have been sold off ... a lot of hot money went into commodities, and the question is whether this is a considered retraction or a rout," said Sean Corrigan, chief investment strategist at Diapason Commodities Management, a commodities fund.

The International Copper Study Group last week said the copper market showed a 24,000 tonne surplus in February and pointed to total reported stocks climbing to 79,000 tonnes between the end of 2005 and the end of April, noted Adams.

"If this turns out to be accurate, then it somewhat dilutes all the talk of supply shortages," he said.

In response, investors have dumped big mining stocks, even though most also produce commodities such as iron ore and coal that mostly sell for fixed annual contract prices, countering the uncertainty of terminal market-traded metals.

BHP Billiton Ltd./Plc. fell nearly 3 percent and Rio Tinto Ltd./Plc. lost about 4 percent on Monday, while world number 2 zinc producer Zinifex Ltd. tumbled 15 percent.

"The mining companies are likely to undergo more pain in the short term as metal prices are expected to remain volatile," said Lucinda Chan, head of Asian business at Macquarie Equities Ltd.

While inflation may be a dirty word for most investors, it has traditionally been good for gold, acting as a safe-harbour as the U.S. dollar's buying clout wanes.

However, the dollar's weak tone has been a relatively minor driver of the gold price, said Commonwealth's Thurtell.

China, the fastest growing market for commodities needed to feed its industrial makeover, is also sending mixed signals.

China's central bank in its annual report said it will try to rein in rapid credit growth in part by raising commercial banks' reserve requirements. It also warned of the potential for bad loans to swell and for financial risks to grow.

At the same time the official China Securities Journal said China should boost its reserves of gold above the current 1.3 percent as gold was playing a more important role in the global monetary system.

© Reuters 2006. All rights reserved.