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metals boom is not over--the age

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    Metals boom is not over
    January 9, 2005

    Demand from China will ensure metal prices remain high.

    Metals soar in 2004

    Most analysts agree that steady demand from China will keep prices high, writes Richard Webb.

    Don't sell your resource shares just yet. Metal prices plunged by up to 8 per cent last week but analysts believe the falls are temporary. They say the commodity boom is far from over.

    While they believe commodity prices will not soar this year like they did during last year's metal pricing bonanza, practically all expect base metal prices to remain at historically high levels - high enough for Australia's big miners such as BHP Billiton and Rio Tinto to turn in record profits.

    Demand for raw materials from China remains strong, they say, and there is no sign of the booming Chinese economy making a crash landing soon. Chinese demand has been supporting decade-high prices in many raw materials and as such there seems little chance that commodity prices will fall sharply in coming months.

    Shane Oliver, head of investment strategy at AMP Capital Investors, says the prices of base metals such as copper, nickel and zinc will continue to rise this year, but not at anything like the rate at which they soared in 2004.

    "There is further upside there," he said. "The best is behind us in terms of the price momentum but stockpiles of most metals around the world remain extremely low while demand remains strong."

    One of the elements of last year's metals price boom was that metal stockpiles also plunged when the prices soared. These stockpiles will need to be replenished this year, and this will increase demand even if global economic growth begins to slow.

    Deutsche Bank head of global markets research David Plank says the CRB index - which measures a broad range of commodities including copper, gold, nickel and oil - is less than 3 per cent below its high of just before Christmas, despite last week's base metals rout.

    "While small moves can have a big impact on the pocket, what we are seeing are squiggles in the data at the moment. It's not the end of the global boom, it's more an adjustment at the margin," he said.

    In a report last week, Goldman Sachs JBWere deemed any pullback in the share price of the major resource stocks to be a buying opportunity. The stockbroker retained its overweight resource sector recommendation.

    "Our belief in the longer-term 'stronger for longer' theme is unchanged, and we would continue to view any pullback in the sector as a buying opportunity," it said.

    The ABN Amro commodities team is not so sure. They believe the fourth quarter of 2004 will be seen as the peak of this commodity cycle, and while prices will not necessarily tumble this year - mainly because metal stockpiles fell so dramatically last year - they believe there is a chance metals prices will begin to ease.

    "In general, 2005 looks to be a transition year for base metal markets. Having enjoyed deep inventory draining deficits in 2004, we expect markets to start moving to balance, notably in the second half of 2005," ABN Amro said.

    Metal markets were clearly spooked last week. There were two reasons for this: a sharp rise in the greenback and the re-emergence of concern over the slowing Chinese economy.

    The US dollar jumped following the release of minutes from the December Federal Reserve board meeting, which indicated the US central bank would push interest rates up quicker than some had anticipated this year. Higher interest rates support a currency.

    Base metals are traded around the world in US dollar prices. When the US dollar rises, base metal prices fall because a rising greenback means that metals become more expensive for non-US buyers.

    Dr Oliver believes the greenback will eventually start heading lower again. "I think the broader trend in the US dollar is down. The US dollar has been falling because of the trade and budget deficits and the trade deficit is at a record level and getting worse."

    Concern over China has been bobbing up every so often for months, and emerged again last week following news that the Chinese Government would not approve any additional aeroplane deliveries this year.

    There are already 147 planes due for delivery to Chinese airlines this year, and a Chinese official said this was enough to meet demand. Because of that, no further approvals would be made, he said.

    But two days later there was another report that China Southern Airlines, the country's largest domestic carrier, was about to make a $US2.4 billion ($A3.2 billion) order for 20 Boeing 7E7 jets, for delivery for the Beijing Olympic Games in 2008.

    Dr Oliver said concerns over China were being overplayed.

    "The Chinese economy is slowing from 10 per cent annual growth to about 8 per cent, which is still very strong. It's a very soft landing if you can call it a landing at all," he said. "Inflation is running at 2.8 per cent, so they don't have a problem there, and the unemployment rate is still reasonably high."

    http://www.theage.com.au/articles/2005/01/08/1104832350616.html?oneclick=true
 
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