In trying to sell investors Monday on its $40-billion (U.S.) plan to go bi-metallic by snapping up Canadian nickel giants Inco Ltd. and Falconbridge Ltd., U.S. copper giant Phelps Dodge Corp. would not provide its own price forecasts for the metals.
Perhaps that was wise.
After a three-year rally that tripled the price of nickel and quintupled that of copper — powered first by soaring demand from China and India, later augmented with billions of dollars pumped in by speculators — a peak was reached in May. Concern that interest rate increases by central banks around the globe could crimp demand for these and other commodities have since toppled prices from their highs, suggesting to some that Phelps may be betting on a rally that has already run most of its course.
“The only thing that got the price of copper up from its fundamental upper band, which is probably $2 a pound ... is speculation and manipulation — it's as simple as that,” said David Threlkeld, president of base metals trading and consulting firm Resolved Inc. in Scottsdale, Ariz. (Mr. Threlkeld is credited with having blown the whistle on a 1990s Sumitomo Corp. copper trading scandal in which a Sumitomo trader was convicted of trying to corner the market.)
The likely penalty for this, he said, is that copper, and virtually all other industrial metals, will ultimately fall farther than they should based on fundamentals. “At the end of the day, speculation and manipulation come back to haunt you, because every action has an opposite and equal reaction.”
Rather than drawing their own line in the sand with forecasts, Phelps executives referred during a conference call only to “consensus pricing” that analysts themselves had come up with.
According to Thomson First Call, those forecasts call for copper prices to average $2.58 a pound this year, falling to $2.40 next year and $2.07 for 2008. The comparable figures for nickel, meanwhile, are $7.50, $7.05 and $6.11 a pound.
As it was, metals prices fell again yesterday on the London Metal Exchange, extending a rout since their mid-May peaks that has grown to the double digits.
Copper futures for delivery in September, fell $260 or 3.7 per cent to $6,740 a tonne — about $3 a pound — bringing the meltdown since its May 11 record high of $8,800 to 23 per cent. As for nickel, which hit a high of $22,200 a tonne on May 26, it shed another $125 or 0.6 per cent, falling to $19,850 or $8.86 a pound.
Some analysts are predicting further declines based on the notion that expected increases in U.S. and other interest rates will slow many of the world's largest economies and cut into demand for these and other commodities.
The U.S. Federal Reserve Board is widely expected to raise its benchmark rate to 5.25 per cent from 5 per cent tomorrow, and traders are wagering on higher rates in Canada, Europe and even Japan before year's end.
On Monday, investment bank Barclays Capital, a unit of Britain's Barclays PLC, chopped its metal price forecasts for this year. The firm said it now expects copper, for instance, to come in at $6,876 a tonne, 5.8 per cent lower than its previous forecast, and nickel at $19,285, down 3.6 per cent.
Phelps said it expects the global appetite for copper will grow by 3.9 per cent a year between now and 2015, while nickel will move up at 4.3 per cent a year.
Patricia Mohr, vice-president of Scotia Economics and author of its Commodity Price Index, said these projections “don't seem unreasonable,” although she cautioned that they are “very long-term forecasts.”
Her figures suggest consumption of both copper and nickel will climb by an average of 4.9 per cent between 2006 and 2008, assuming there is a slowdown in the global economy next year “but not an outright recession [and] I don't really think there is any reason to expect anything like that.”
To be sure, other analysts argue that the so-called “supercycle” that has driven metals to record highs over the past five years will continue for several more years, albeit less evenly.
Gary Mead, senior commodity analyst at Virtual Metals Consulting Ltd. in London, said the growth forecasts from Phelps may be low.
“They mask a set of deeper imponderables, especially concerning demand growth in Asia, which I would suggest could be double those figures in both metals, at least over the next five years anyway — barring an economic slowdown in China,” he said in an e-mail.
“I am more bullish about China's continued growth than some people, largely because I don't think the Chinese authorities can afford to disappoint their rapidly growing urban classes, who have exactly the same materialistic aspirations (cars, electronics, travel, domestic goods, housing, communications) as anyone else, all of which means buoyant demand for copper and nickel and zinc and stainless steel.”
