Base metals prices recovering on China, diminishing financial stress

- Sentiment recovering, reinforced by supportive fundamentals "Improved sentiment on Chinese policy direction and reduced fears that a European financial dislocation would derail the growth economies have led to sharply higher metals prices. Zinc and copper – the metals with the strongest medium-term outlook – have led the gains, reinforcing our view that longer-term growth expectations will remain the key driver of relative price levels. Adding to the improving sentiment have been mildly tighter physical markets, as global inventories continue to draw and delivery premiums across products remain firm despite some seasonal weakness and softening economic indicators since late May."
- Risk/reward for long positions less compelling, but we expect further upside for copper and zinc "We continue to believe that fluctuations in trend growth expectations will
drive price volatility during 2H2010. Further, the strength of the recent rally reduces the risk/reward for long positions. However, we believe that the fundamental drivers for metal demand remain strong and we continue to expect further upside for copper and zinc, the more supply-constrained metals over the medium term. The systematic rolling forward of our 3-, 6-
and 12-mo forecasts suggests a 6-mo copper price forecast of $7,925/mt. Accordingly, we maintain our recommendation for a long position in Dec- 10 copper. However, given the near-term uncertainty, recent price strength and relatively low volatility, we believe that the current environment is providing a compelling opportunity for second half producer hedging."
- Near-term nickel price risk skewed to the upside, but remain neutral medium term "Although we remain neutral-to-bearish on nickel and aluminum over the medium term, we believe that nickel may have near-term upside before year-end given the risk of another temporary imbalance. We believe that aluminum price risk is skewed to the downside from current levels."

GoldmanSachs Metals 20100803

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