Prices of industrial commodities to cool off

Prices of almost all industrial commodities, barring cotton, are likely to cool down in 2008, after handsome gains in 2007, when a supply glut is expected to supersede demand, according to the latest forecast by the Economic Intelligence Unit.

The gains in 2007 would see the EIU's Industrial Raw Materials price index will rise by an average of 12 per cent, their sixth consecutive annual rise, the report said.

While the aluminium price is forecast to decline by 4.8 per cent in 2008 from a healthy 3.4 per cent rise in 2007, the prices of copper, lead, nickel, tin and zinc are set to slump by 3.1 per cent, 9.9 per cent, 6.2 per cent, 7.2 per cent and 21.6 per cent from their respective gains of 5.1 per cent, 73.4 per cent, 77.2 per cent, 50.4 per cent and 3.7 per cent.

In 2009, however, the prices of all base metals, except aluminium, would go down further by up to 40 per cent. The aluminium price is forecast to gain marginally by one per cent in 2009, the report said.

The EIU estimates cotton prices to remain upbeat throughout the next three years, rising 3.1 per cent in 2007, 12.1 per cent in 2008 and 9.2 per cent in 2009.

Cumulatively, the base metal prices are set to rise by 12 per cent this year. However, the risks of a market correction are growing with the prices now appreciably higher than the marginal production costs, the report said, adding that it would only take a small increase in stock levels to trigger a sharp fall in the market.

Despite increasing the mining and smelting capacities, the demand for base metals will remain strong (with China offsetting weaknesses elsewhere) and prices will slip by less than 7 per cent.

In 2009, the return to surplus metals may produce a steeper decline of up to 12 per cent, subject to unplanned delays that may tilt the balance of risks to an upside in prices.

The report further said that high prices were not affecting demand, partly because prices of other commodities have also risen rapidly, limiting the scope for substitution.

More importantly, China's hugely growing raw material needs,  running at double digit growth rates, are likely to result in phenomenal increases  in prices of all industrial commodities.

Crude oil prices, too, will rise by 7 per cent this year, following a near 20 per cent hike in 2006 after the Organization of Petroleum Exporting Countries (Opec) decided to cut back production earlier this year.

According to the EIU estimates, crude oil prices may stay on an average at $70/b in 2007 following strong demand from the US, China and West Asia.

Noticeably, non-Opec supply growth is slowing, following project slippages, rising costs and declining reserves. In 2008, prices are likely to average around the same level due to the Opec's unplanned production boost.