Paradigm Capital Analysts Raise Base Metal Targets

The past several months of economic uncertainty have taken their toll on base metals. While copper has held up well, other metals such as nickel and zinc have plunged back to earth.

In a research note titled "Seasonal Weakness or End of the Cycle?," Paradigm Capital analysts Dave Davidson and Jacob Willoughby take the view that most of the base metals are "adequately priced" based on their current supply/demand situation. However, they also revised their price targets on most metals upward to reflect the rapid rise in capital and operating costs that is plaguing the mining industry.

The analysts pointed out that the U.S. economy, if not already in recession, is certainly close to one. As well, there are legitimate concerns about how well Chinese demand for metals will hold up. However, they also noted that the movement of bulk commodities around the world continues at near-record levels.

They wrote:

While the miracle of global synchronized growth has dissipated, we are of the strong belief that after a few quarters of slow, but positive growth, the world's economy will re-engage and continue to fuel the global commodity boom. It is our view that the commodity cycle has temporarily stalled, not ended.

They noted that inventories for most metals remain low, though lead and zinc are two exceptions. But they "fully expect" prices to consolidate around these low levels over the next couple of quarters (though with plenty of volatility).

The analysts have raised their mid-term and long-term price targets for copper, zinc and nickel, while also making some minor upward revisions to lead and cobalt. In the case of zinc, they added to the speculation that more mines will close because of the high prices, saying they fully expect some "high profile closures."

These are their average price forecasts (per pound of metal):

Copper
2008: $3.35
Long-term: $1.75

Zinc
2008: $1.00
Long-term: $0.80

Nickel
2008: $12.00
Long-term: $7.00

Lead
2008: $1.05
Long-term: $0.70

Comments

[The Anthrop...:]

Somehow I can't see copper at $1.75 - ever - unless someone comes up with a cheaper substitute (very unlikely).

2008 Jul 27 07:17 AM

[Bill Herbert:]

Copper will be closer to $5 in a year than $1.75. Count on it.

The pundits that have been lowballing the copper price for the past five or six years seem to not have a clue as to the dynamics of global growth, the severe supply constraints, plus the urgent need for more local power generation and efficient transmission - and all of these point to higher copper prices, not lower.

India is now where China was about ten years ago - on the verge of explosive industrial and also consumer and housing growth. The number of new electric vehicles that will be produced in the next ten to fifteen years could drive copper up 100% from here, easily.

Copper at $1.75 is a ludicrous prediction - the impending collapse of the US $ alone virtually guarantees that that price will never be seen again, IMO.

2008 Jul 27 11:33 AM

[redrum:]

Was this meant to be posted on April 1st??? Copper will be at least $5 in a year.

2008 Jul 27 12:38 PM

[Urbane Gori...:]

Re: "However, they also revised their price targets on most metals upward"... The prices quoted above are considerably lower this year compared to forward years. Did you inadvertently confuse the two numbers??? i.e. Copper at $3.35 for 2008 and $1.75 long term? That isn't upward.

Also, like to see some type of verification as to their creds. How successful have they been in the past? Did they catch major moves in advance? How do their prophesies compete against other market foretellers?

Thx jegan ;-)

2008 Jul 27 04:28 PM

[Urbane Gori...:]

Re: "However, they also revised their price targets on most metals upward"... The prices quoted above are considerably lower this year compared to forward years. Did you inadvertently confuse the two numbers??? i.e. Copper at $3.35 for 2008 and $1.75 long term? That isn't upward.

Also, like to see some type of verification as to their creds. How successful have they been in the past? Did they catch major moves in advance? How do their prophesies compete against other market foretellers?

Thx jegan ;-)

2008 Jul 27 04:28 PM

[cherf:]

Let's see. A world moving towards electric vehicles as fast as it possibly can. Copper, the principal element involved in electric motors, drops 66%? Are you joking?

And uranium's going to go down too I suppose? What with all those nuclear plants Westinghouse and Areva are building? Heck, those plants won't need copper since the distribution infrastructure is mostly in place.

But Toyota is going to need copper. Lots and lots of copper.

2008 Jul 27 04:45 PM

[Tom Szabo:]

The reason given for ever-rising copper prices is the same for lead, zinc, nickel and uranium, each of which has already dropped 60% from peak levels even though a global industrial slowdown is still just a prediction. The idea that copper could also drop 60% isn't that farfetched. Industrial metal prices always return to their marginal cost of production over the long term. Currently, that price is under $1.50 but set to rise perhaps to $2.00 in the next few years (on the other hand, it could decline if high cost producers go out of business).

Electric cars won't be produced in large numbers for at least a couple of years. Even so, the average gasoline car today uses 50 pounds of copper, and SUVs clearly use much more than that simply by virtue of their size. Assuming an EV doubles the average and 10 million are produced (a BIG assumption), we are talking about "only" 500 million pounds, or 250,000 tons, of incremental copper demand.

More than that much has already been lost by the slowdown in global construction, which constitutes 40% of copper demand. I personally believe a 50% shrinkage in construction is possible when it bottoms in the years ahead, leading to a potential decline of global copper demand in the range of 1-3 million tons per year. No doubt this would be a temporary drop within the long term uptrend in demand but copper prices wouldn't care. They would fall 60%, just like zinc, lead, nickel and uranium already have.

My credentials: Holding a decent number of COMEX put options in copper (ie., putting my money where my mouth is).

2008 Aug 03 12:39 PM

[Enrange:]

#1. The revision of copper prices to $1.75 raises their long term target from a previously lower level ($1.50?)

#2. As a (albeit small) player in the copper/brass industry, I can assure you that the global slowdown is real and we are certainly not anticipating price to increase above $3.50 for the remaining of this year. The industry mode is definitely pessimistic and today's sell-off hopefully will shake some of the speculators and hedge funds out of the market. Don't expect anything positive near term, but likewise I doubt highly,with energy and production costs being what they are, will we see $1.75 ever again. Probably more like $2.50 to $3.00 before long term forces drive it higher again.

2008 Aug 04 07:26 PM