Metals: Balanced view for 2H10, but upside for 2011 intact

- Metals prices have been trading within a range this year "Following sharp price gains as the global economy emerged from recession, metals have been trading within familiar ranges during the past few months. This was peculiar because copper fundamentals strengthened visibly, with LME stocks for instance drawing since March. Physical copper premia, which are a good indicator for the tightness of regional metal markets, have also generally been well supported and rose to an extremely high $150/t in China. Subdued upward pressure on base metal prices has been heavily influenced by increasing macro headwinds as the initial steady recovery started to fade. Headwinds have been reflected in a host of indicators, with last week’s release of US trade data suggesting that 2Q GDP growth is tracking at only 1.3% QoQ annualised according to our economists. There is also evidence of a slowdown in China, the most significant metals consumer, as the government has been tightening policy selectively."
- We see some downside risks to base prices during 3Q10 "Activity in the metals industry normally slows during the summer months, which often reduces price support during that period. With this in mind, we believe that there is a risk for prices to come under pressure and copper could fall to $6,500/t ($2.95/lb) in the coming weeks. Yet, at the same time we see scope for an increase in activity later in September, which should support metals quotations. Our generally balanced short-term view also implies that price movements will likely remain choppy. Nevertheless, without a double dip, we believe that metals should be well supported in 2011."
- Despite uncertain outlook, we keep positive view for 2011 "Our generally positive view on metals for 2011 is based on the BofA Merrill Lynch Economics team forecast that global GDP will rise by 4.2% YoY, following a 4.6% expansion in 2010. It is worth noting that even though Chinese authorities will likely keep a tap on speculative activity in the property sector, measures have been taken that should at least partially offset that. Nevertheless, despite persistent supply constraints for some metals, risks are skewed to the downside and any signs of a sharper than anticipated slowdown (which is not our base case) would likely lead to a reduction of our forecasts. Meanwhile, we also reinforce our gold call and see prices gradually rising to $1,500/oz during the coming 18 months."
- Upgrades to longer-term prices "Using a combination of project incentive prices and marginal production costs, we have adjusted our longer-term prices."

Merrill Lynch Metals Strategist 20100817

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