Most Metals Prices Headed for a Drop

This story has been updated since it was first published on Feb. 7

Look for recent steep hikes in metals prices to go into reverse by spring, as investors’ expectations run up against economic realities: A pokey U.S. economic recovery and waning demand from China, which had been stockpiling bargain priced supplies.

Manufacturing and other industrial use of metals will remain tepid. Meanwhile, even China’s voracious purchases of metals that boosted prices by 50% or more since fall won’t be enough to sustain further price run-ups, given the abundant supplies of metals. Nickel supplies, for example, are at about a 20-year high. China’s new, tighter bank lending policies and a strengthening dollar will further restrain metals usage and prices.

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Moreover, the recent commodity rally sparked by fears of possible debt repayment defaults by Greece and Portugal will run out of gas soon; it’s just a hiccup in the overall trend of sliding metals prices.

Prices for nickel will slip 20% by fall, while aluminum and copper prices will tumble 25%. The decline for zinc prices should be around 15%. That’ll put prices back in the neighborhood they were in last fall for a few months, before they head up again around November in anticipation of a stronger 2011 economy.

Still, the average price this year will run much higher than last year, up about 10% for nickel, 20% for aluminum, 25% for copper and around 45% for zinc, mainly because prices early in 2009 crashed in the wake of a recession-induced selloff.

For steel, the opposite scenario: Prices will move modestly higher through June, due to a surge in prices that took hold last fall for scrap metal and iron ore. This was largely China’s doing, too. Its industries went on a buying binge for low-priced scrap that’s made into new steel in electric furnaces.

“There is great suspicion that China acquired vast amounts of iron ore so come March when (world) prices are negotiated, China can drop out of the market entirely and use its leverage” to secure lower prices, says John Anton, a steel analyst with IHS Global Insight.

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