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Commodity Mkt Drop Spells Gloomy Times For Metals – JPMorgan

August 27, 2008 at 16:49 by Mario

The fall of nearly 20% in recent weeks in the commodity markets, across sectors, spells gloomy times for the base metals bull cycle, but China’s post-Olympics industrial restart holds promise for the fourth quarter, said JPMorgan Analyst Michael Jansen Wednesday.
“Questions are being asked as to whether the commodity cycle has in fact turned, but looking at the metals in isolation, the answer to this question is a clear yes,” said Jansen in a metals review and outlook, lowering 2008 price forecasts for all except aluminum.
Copper prices, forecast down 4% from previous expectations to $7,985 a metric ton on an average for 2008, are expected to fall to around $6,950/ton next year.
But before hitting that level, prices are set to rally back to copper’s 2008 record highs of $8,940/ton on the back of a “fixed asset investment shock” to Chinese copper demand during the fourth quarter as factories reopen after the Olympics and China’s government addresses slowing economic growth, Jansen said.
Until recently, the metals market bulls have taken refuge in the theory China’s infrastructure projects and its growing domestic market will offset the negative impact of a slowing global economy, accounting for a structural shift in metal prices.
And for copper and aluminum prices, this has been true to an extent.
But according to the LMEX index, a basket of London Metal Exchange traded base metals, the sector has struggled to post new highs despite sharp rallies in copper and aluminum during the first two quarters this year.
“On this basis, the metals market has been exploring the downside for 16 months, but the move lower has clearly been slowed by a more robust structural demand story in a long-term context and still evident occasional supply side concerns in the copper and aluminum sectors,” said Jansen.
But cyclical demand for base metals has deteriorated significantly in the past 3–4 months, led by the U.S.
Also, inventories — a key reason behind the enduring metal price strength earlier this year — are either at above long-term average levels or at least higher than in the beginning of the year for all base metals, with the exception of copper.
The slowdown in developed countries has undermined the above average pace of commodity demand of the past 4–5 years, founded on a prolonged period of synchronized growth in developed countries, and industrialization and urbanization in emerging countries, Jansen said.
China now holds the key for metals direction, as heavy industry around Beijing starts up again; much also depends on if and how the government counteracts signs of slowing economic growth.
“How China’s industrial complex emerges in the fourth quarter will have a material impact on the performance of the metals sector, and commodities in general, through up to the year-end,” Jansen said.

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