Page last updated at 23:28 GMT, Monday, 15 February 2010

Metal prices rising strongly again

By Will Smale
Business reporter, BBC News

Copper wire
Copper prices soared between 2000 and the first half of 2008

Global metal prices have had a rollercoaster ride in recent years - and they are rising strongly again.

The cost of base metals such as copper and aluminium have traditionally been completely overshadowed by the price of crude oil.

It was oil that got the headlines, while copper and the other main metal commodities stayed very much in the background.

All this changed in the year or two before the global economic bubble burst in the summer of 2008.

Yes, the rapidly increasing price of oil still dominated the financial headlines, but suddenly there was also a lot of reporting on the fact copper and other metal prices were also hitting all-time highs.

Figures from the London Metal Exchange tell the story - in April 2000 the price of "bell weather" metal copper was $1,679 per metric tonne, by April 2008 this had risen to $8,685.

Little wonder local newspapers across the UK had started to write stories about big increases in cases of thieves stealing copper pipes and wires to sell on the black market.

China is the main driving factor, and other developing countries such as India and Brazil, whose economies are also continuing to grow strongly
Fairfax economist Dmitry Kalachev

For a moment you would have thought copper was the new gold.

At the same time, a growing number of metal mining companies had quietly made it onto the FTSE 100 index of leading UK shares, many with rather un-English sounding names.

There was Antofagasta from Chile, Mexican business Fresnillo, India's Vedanta, and Kazakhmys from Kazakhstan, out of a total 11 mining firms that still remain on the FTSE.

And instead of being unassuming members of the index, the mining stocks have very often been the FTSE's biggest daily risers or fallers, such has been the volatility of global metal prices in recent years.

China's metal appetite

The big growth in the price of base metals up to mid-2008 was led by China's arrival as a new economic powerhouse with an insatiable appetite for raw materials.

The giant Chuquicamata copper mine in Chile
Analysts say global copper supplies remain tight

Such was China's need for copper in particular, that global demand started to outpace available supplies, and the price shot up accordingly.

While China's imports of copper and other metals has remained high post summer 2008, demand in the West tailed off as the recession hit North America and Europe, and prices fell back accordingly.

By December 2008 copper prices had slumped to $3,072.

But with the global economy slowly recovering last year as the US, Japan and leading European economies Germany, France and the UK all exited recession - albeit hesitantly in some cases - metal prices recovered in 2009.

The price of copper rose to an average of $6,590 last year.

Tight supplies

For most metal analysts prices are set to rise further in 2010, but it could be a bumpy ride along the way.

London remains the leading centre of expertise for investing in the global mining sector
David Wilson, director of metals research at Societe Generale

"We see metal prices being strongly up on last year, but still with a lot of volatility," says David Wilson, London-based director of metals research at Societe Generale.

"If you look at copper in particular, the price at the moment is around $6,567 a tonne. We forecast this to rise to an average of $7,435 for the year as a whole.

"We predict the rise because global demand is rising strongly again, while copper supplies remain tight."

Mr Wilson says the likely volatility comes because of concerns about macro issues, such as whether the debt problems in Greece, Portugal and other European countries could hit the global economy.

"There have also been concerns that demand for metals could fall in China because of the country's fiscal tightening," he adds.

"But I think that is a little misplaced - the Chinese economy is still on target to grow 8% this year, the government just doesn't want it to grow any faster than that."

Greece fears

Fairfax economist Dmitry Kalachev agrees, predicting that China's vast imports of base metals will continue to rise strongly, despite the country's monetary tightening measures.

The price of copper

"We see copper rising to an average of $8,200 this year," he says.

"All the major infrastructure projects in China this year are still in place.

"The debt situation in Greece and Portugal could have some [negative] implication on commodity prices if it causes the euro to fall in value."

This is because commodities are priced in the US dollar, and a weaker euro would make them more expensive to buy for country's in the eurozone.

Yet Mr Kalachev says an impact on the price of commodities from Greece and Portugal will likely be limited.

"China is the main driving factor, and other developing countries such as India and Brazil, whose economies are also continuing to grow strongly."

Charles Kernot, director of metals and mining at Evolution Securities, is far more cautious, but still sees metal prices going up.

"We see the price of copper rising from an average of $6,590 last year to $7,660 this year," he says.

"But it is going to be pretty volatile.

"All the uncertainly in Europe surrounding Greece, Spain and Portugal is creating a lot of uncertainly, and there is concern about the impact of the ongoing tightening in China."

FTSE boost

Mr Wilson adds that the expected further increase in metal prices will also likely lift the share prices of the 11 mining stocks on the FTSE, helping to raise the index in the process.

MINING FIRMS ON THE FTSE 100
Anglo American
Antofagasta
BHP Billiton
Eurasian Natural Resources
Fresnillo
Kazakhmys
Lonmin
Randgold
Rio Tinto
Vedanta
Xstrata

But why is the London Stock Exchange proving such a popular place for foreign mining firms to list their shares? Mr Wilson says there are a number of factors.

"London remains the leading centre of expertise for investing in the global mining sector, so firms know they can best attract investment here," he says.

"The London Stock Exchange is also well regulated and transparent, and has a history of companies successfully listing.

"So you can see why it is proving so popular for foreign mining firms."

Whatever happens to metal prices this year, they are likely to remain in the news.



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