Base metals

Spring season

What is pushing up the price of copper and other base metals?

AS WELL as being close to each other on the periodic table, copper, nickel and zinc share several traits. Like other commodities such as oil and gold, the prices of all three are soaring again after a crisis-induced collapse (see chart). In an astounding recovery, metals prices have almost doubled over the past year.

Copper, used for electrical wiring and in construction, has had the most striking ascent. It briefly rose above $8,000 a tonne on April 6th, its highest level since August 2008 (and within shouting distance of its record of nearly $9,000, set in April that year). Nickel, mainly used to make stainless steel, has gained 32% since the start of 2010 and, at around $25,000 a tonne, is close to a two-year high. Zinc, lead, tin and aluminium have also run up smartly over the past year.

Growing optimism about the world economy helps explain why prices are surging. News from developed economies has become sunnier. And metal-hungry China (it consumes a third of the world’s base metals) is expected to grow so fast that its metal demand could return to pre-crisis levels in a year or so.

Supply and demand is not the only thing helping keep prices aloft. There is an “extraordinary market” for copper that has departed from fundamentals, reckons Andrew Keen at HSBC. Growing copper inventories at metals-exchange warehouses (half a million tonnes or so by some estimates) have coincided with increasing prices. The same seems to be happening with aluminium, lead and nickel. In the past, prices have fallen as warehouse inventories have risen.

Some observers attribute this phenomenon to investors buying metals in the expectation that prices will rise further in 2011, when demand is forecast to outstrip supply. Yet prices may crumble if speculators suddenly get cold feet. A shift away from the low interest rates that have encouraged commodity investments could spark a change in sentiment. So might a rising dollar: commodity investments offer a hedge against a depressed greenback. Mining bosses acknowledge that prices may be more volatile as a result of such investment.

Price rises in nickel, lead and zinc may slow in any case. The ores of all three metals are plentiful, so it is easy to expand production. Stainless steel can be milled without much nickel, although the end-product is harder and more expensive to work. Nickel restocking to replace inventories run down after the crisis will come to an end eventually. The momentum of copper, whose supply is harder to ramp up, looks more resilient. Copper mines need constant spending to maintain peak output. The collapse last year of investments in working mines will keep supply tight for a while yet.