UBS expects weakening of base markets in 2008

UBS, the global financial services firm, has reported that it expects a slowdown in the US economy in 2008 to weaken the price of base metals.

The group’s chief analyst, Joachim Klement, believes that the predicted slowdown in the US economy will lead to a fall in commodities demand as “historically, the performance of industrial metals mirrors US industrial production”.

However, he still expects “copper and aluminum to buck the trend and outperform the complex.”

At the same time, Mr Klement is warning that: “A crucial factor in the near future could be measures taken by governments aimed at environmental protection by curbing energy intensive industries.”

According to the report, warehouse stocks of industrial metals remain at low levels: copper stocks are a 2.6 weeks’ consumption; zinc 2.5 weeks and nickel is at four weeks.

Copper prices could rise in 2008 due to an increase of imports of refined copper, and an anticipated 6% increase in Chinese demand (following on from a 23% increase in 2007).

Also with regard to China, UBS sees the imposition of export taxes as a pivotal driver of prices in 2008 and that “This development may be particularly favorable for aluminum and copper.”

The imposition of new taxes could mean that in 2008, China becomes a net importer of aluminium.

The zinc price has rallied during 2007 but UBS is forecasting that “strong growth in mine production and the addition of new smelters in China during the second half of 2008 is likely to keep the market well supplied, hence weakness could be seen in zinc.”

Finally, the report notes that nickel prices have been falling “due to weak demand from stainless steel producers” and that the situation is expected to continue into 2008.