Base metals correction a ‘breather’

With the rapid rise of base metal prices during the first half of 2006, it wasn’t a question of if there would be a correction, but when.

Base metal prices have fallen back considerably from the record highs set in mid May, but prices across the board remain higher than at the beginning of 2006.

DJ Carmichaels resource analyst Paul Adams told WA Business News the market had undergone unprecedented growth in base metal prices during the first five months of the year.

“Driving the prices was copper, with its price pretty much going vertical,” he said.

“That was a situation that was untenable and there needed to be a correction, which I think will continue for the next few weeks.”

Hartleys resource analyst Andrew Rowell said he expected commodity prices to stabilise over the next 12 months. 

“It looks as though prices have come back [as a result of the correction] as far as they are going to,” he said.

According to base metal price data released by Iress Market Technology, the copper price catapulted from $US2.08 a pound at the start of the year to a high of $US3.99 in mid May, a jump of 92 per cent. Since then the price of copper has gradually fallen back to $3.04 as at June 23.

Meanwhile, the gold price climbed from $707 an ounce at the start of January to $913 an ounce in mid-May, an increase of 29 per cent. However, as the market correction took hold, gold prices declined sharply from their May high to $768 an ounce in mid-June, a fall of 19 per cent.

“I think [the gold price] will bounce back,” Mr Adams said. “The pull back allows for consolidation in the market...a breather.”

This view is echoed by the Australian Bureau of Agriculture and Resource Economics June quarter commodities report, which highlighted a forecast increase in gold prices in the second half of 2006 and in 2007, mainly due to the strength of investment demand.

“Investment demand for gold is expected to continue to be supported by a number of factors, including: as a hedge against a potential increase in global inflation (driven by high and volatile world oil prices); ongoing concerns about the large US current account deficit (and the potential impact on the US dollar); uncertainty over Iran’s nuclear program; and the possibility of terrorist activity,” the Abare report said.

The decline in copper prices, according to Abare, was as a result of investors responding to the prospect of higher global interest rates with the expectation of high prices for the remainder of 2006.

“The combination of strong demand and constraints on supply growth are forecast to result in global copper prices increasing by 66 per cent in 2006 to average around $US6,120 a tonne ($US2.77 a pound),” Abare said.

Zinc prices have also increased dramatically, climbing 107 per cent to $US1.81 in mid May and then falling back to around $US1.33 in late June.

“The rise in [zinc] prices so far this year reflects a market characterised by slow growth in zinc mine supply, concerns over supply disruptions, strong global demand for zinc and low and steadily declining zinc stocks,” Abare said.

The report also expected the value of iron ore exports to grow by nearly 30 per cent to $17.4 billion in 2006-07, with iron ore production expected to increase 13.3 per cent to 305.2 million tonnes over the same period as a result of increasing demand in China.