For the first time since the base metals bull market started in 2001, the mining executives, metal traders and investors gathering for the London Metal Exchange week’s dinner tonight face an uncertain outlook.

The possibility of a significant US economic slowdown that could extend to other geographical areas in 2008, and cut consumption, is a threat to the longest and strongest base metals bull market in a generation, argue the bears.

The bulls, by contrast, say that the continuing economic boom in China should ensure demand for metals remains robust.

But in spite of arguing about the severity of any downturn there is one thing on which both sides agree: the days when all metals prices rose in harmony, as seen from 2001-06, are now over.

The skill will be to pick the winners and relative losers in the metals complex.

Paul Robinson, a manager at CRU, the London-based metals consultants, said that on average prices would drop slightly next year. But he ruled out a price collapse and said that the market could even witness some short-term rallies in 2008.

“Prices will remain well above their historical average,” Mr Robinson said.

David Thurtell, of BNP Paribasin London, added that although he forecast modestly lower prices in 2008, base metals prices “will remain extremely high compared with the 1990s and early 2000s”.

Prices have recovered from recent weakness triggered by the credit turmoil, supported by strength in the Chinese economy and the infrastructure requirements of developing nations such as India and Brazil.

The LME index, an average of base metals’ prices, has rebounded almost 15 per cent since mid-summer low, although it is trading at roughly at the same level as a year ago, because nickel, aluminium and zinc prices have fallen over that period.

In spite of a cloudy outlook, investor money flows into base metals have jumped. Open interest hit a record last week, after rising by almost a fifth in the past year, as more producers, consumers and hedge funds bet on metals prices.

The LME itself, once considered a niche market, is set to expand further in 2008 with new members and more products including new steel contracts.

ED&F Man, the soft commodities merchant, became the first member in 10 years to join the floor of the exchange last week.

Gayle Berry of Barclays Capital says that even assuming a further slowing of US metals demand, the strength of consumption in other parts of the world means supply will struggle to keep up and prices would remain high.

But Peter Fertig, of Dresdner Kleinwort, warned that base metal prices were beyond their peak.

Copper prices, usually seen as the barometer of sector sentiment, are trading at around $7,950 a tonne, higher than this time last year.

Published on 10/8/2007 at Financial Times

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