Outlook 2008 (9 sectors to watch): Metals

For the first time since the base metals market began its bull rampage five years ago, the outlook is uncertain.

It’s been five years since the bull began its rampage through the base metals markets, fuelled by a booming U.S. economy and Chinese demand for copper, nickel, zinc — and just about everything else. But for the first time since then, the outlook is uncertain. Bullish market-watchers speculate metals might cool, but continued strong demand from China will keep prices buoyant; more bearish investors fear the weak U.S. economy could end metals mania.

Even optimistic analysts admit that prices for just about all base metals are going to come under pressure as a result of increased uncertainty in the U.S. economy. The news won’t be all bad, predicts François Dupuis, head economist for Montreal-based Desjardins Group, in his commodity trends outlook. “A sharp correction would be surprising as long as China’s runaway economic growth continues to support demand,” he says.

Copper prices ended the year on a weak note, despite major labour disruptions at mines in Mexico, Chile and Peru that helped keep about 800,000 tonnes — about 5% of global mine production — off the market. Most of those disputes have been resolved, which means more copper will hit the market in 2008 and push prices lower, according to a recent report by TD Bank Financial Group. Increased use of cheaper scrap copper, as well as additional copper production from new mines in Africa, will also push prices lower in 2008, the report predicts.

Increased production will also likely put downward pressure on nickel prices — but not until later in 2008, according to TD. Nickel investors were taken on a wild ride in 2007, as prices surged to US$24 per pound in May, only to fall sharply to about US$12 per pound in August, as stainless steel producers announced cutbacks and mines increased production.

Does this weakness mean the end is near for the so-called commodities supercycle? Investors may get the answer soon, says Donald Coxe, global portfolio strategist at Toronto-based BMO Financial Group, in his recent commodity outlook. Five years ago, Coxe predicted the commodity market was about to enter its great bull run, and he predicts it will remain strong for the next five years — with one caveat: “We foresee just one major setback for commodities — a U.S. recession, which may or may not trigger a global recession.” If that happens, all bets are off.