resources to stay high

Resource prices to stay high: Deutsche

January 16, 2007

DEUTSCHE Bank, Europe's biggest securities firm, said falling commodities prices in the past month did not indicate the end of a rally that began five years ago, in contrast to a forecast from rival ABN AMRO.
Commodities prices are undergoing a "recurrent correction in a continuing bull run" and could stay high for an extended period, Michael Lewis, Peter Richardson and other analysts said in their report. Prices of nickel, zinc, gold and grains could rise further this year, the bank said.
The Reuters/Jefferies CRB index of 19 commodities has fallen 9.6 per cent since the end of November, and Dutch bank ABN AMRO said last week the slump was "the definitive end" of a rally in base metals. Copper has declined 35 per cent since reaching a record in May last year and oil is down 32 per cent since July.

But the Deutsche Bank analysts said the supply-demand situation still provided "the basis for an extended period of margin expansion for producers as a result of elevated prices". Global economic growth would be "above trend" and investors should favour metals such as nickel and zinc, which still faced shortages.

Goldman Sachs JB Were, the Australian affiliate of the world's most profitable investment bank, also said last week that the recent fall in metal prices was a "temporary correction". An adjustment to the weightings of the Dow Jones-AIG Commodity index had led funds to sell metals, and commodities would still benefit from Chinese demand and tight supplies, Goldman said.

Deutsche raised its price forecasts for nickel, used in stainless steel, by 62 per cent for 2007 to $US14.28 a pound, and by 110 per cent for 2008 to $US14.06 a pound. Spot nickel prices averaged $US10.96 a pound in London last year. The bank also increased its 2006 zinc forecast by 6.7 per cent to $US1.67 a pound.

Rising demand from Chinese stainless steel makers, and delays to the nickel projects of CVRD and BHP Billiton, the world's largest and third-largest mines under construction, meant there would be a nickel deficit until 2009, the bank said.

The report from ABN's analysts led by London-based Nick Moore said the five-year price boom in industrial metals, such as copper and zinc, was set to end in 2007 as supplies rose.

"We are witnessing the definitive end of the commodity price boom that began late in 2001," it said. "Prepare for a down year for commodities as markets move towards increasing supply surplus."

Gold prices should gain later in the year, as Deutsche expects a weakening US dollar will lead investors to find the precious metal more attractive as an alternative investment.

Bloomberg