RBC Capital Markets: Solid Prospects for Base Metals

Sep.21.09 | About: PowerShares DB (DBB)

Is the rebound in base metal prices overdone? The jury is out, but RBC Capital Markets analysts Fraser Phillips, Adam Schatzker and Robin Kozar are still relatively upbeat on the long-term prospects for most of the metals. In a note to clients on Monday, they laid out their thoughts for each one.

Aluminum: Downside risk is limited from here, as the current spot price is at the 95th percentile of their 2009 cost curve, and is very low in real terms versus inventories as weeks of consumption. But high inventories and capacity could restrain any price increases. Their long-term price target is US90¢ a pound.

Copper: Global copper inventories continue to increase, and that points to downward pressure in the short term. But the analysts expect copper to be in deficit starting next year, with inventories dropping "below critical levels." They expect average prices to rise to US$3.00 a pound in 2012 and US$3.25 a pound in 2013, though their long-term price is a more modest US$1.75.

Molybdenum: Prices are correcting after a dramatic run-up early this year, as no one but China wants to buy very much. The analysts expect further downside risk over the next three to six months, followed by a dramatic rebound in 2010 and 2011 when demand recovers. The long-term price forecast is still a relatively modest US$11.00 a pound.

Nickel: This is one metal that they are not too excited about. In the short term, labour troubles in Sudbury should provide support to prices. But given high inventory levels, they do not think this rally is sustainable unless demand outside of China picks up. They expect prices to fall in the fourth quarter, and remain constrained as idle capacity around the world comes online. Their long-term forecast is US$7.50 a pound.

Zinc: Some downside risk is possible in the near term as the price is high based on technical parameters. But a shortage of mine supply should tighten up the market over the next few years. Their long-term target is US90¢ a pound.