MRE: Resources (Metals) Sector Momentum

The recent moves in base metal prices have taken the spot prices well above Macquarie Research Equities (MRE) previous annual forecasts for 2006. As a result MRE has decided to strongly raise many base metal price forecasts for 2006-2007. In turn MRE has a preference for for Alumina (AWC) as a high quality, leveraged aluminium play and Oxiana (OXR) and Kagara Zinc (KZL) for copper and zinc exposure.

The recent rallies in base metals can be found to be driven by 'fund flows'. There is an expectation that commodity fund and index buying will continue to support the base metal prices in the medium term. Similar to the case in the 1980s, inventories are tight. MRE concedes that base metal prices increasingly difficult to predict. MRE price forecasts are consistently generated on the basis of detailed supply/demand and econometric models. That said, extreme tightness in metal markets, and the impact of ‘funds flow’ has made it increasingly difficult to predict short term movements in metal prices.

MRE considered 2005 as "the year of the bulks" considering unprecedented movements in iron ore and coal prices. MRE would consider 2006 as the "the year of the base metals" - as copper, aluminium, zinc and nickel prices have exceeded even the most bullish estimates while bulk commodities, to this point, have settled in line with market expectations.