GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Metals Weekly podcast. Joining me on the line is Ben Westmore, he's a commodities economist at National Australia Bank. Gold prices fell a little bit this morning in early trade but clearly there is a lot going on in the macro economic side and a lot of the focus on what's going on in China, particularly after comments over the weekend about Chinese inflation. What are the expectations both short term and long term?
BEN WESTMORE: There's no doubt that one of the biggest concerns for the Chinese administration and involving concerns globally is these inflationary pressures. If you look at the Chinese consumer prices and you decompose the aggregate by component, a much greater share of the component is now growing well in excess of 3%. So while originally we put a lot of the inflationary pressures down to food prices it does seem that those pressures are now broadening out and its becoming more broadly based. That's an obvious concern. One thing that the administration do have in their favour is that policy rates are still around 140 basis points below where they were prior to the crisis, so there is more capacity for the PBOC to tighten and we expect they will tighten through the rest of the year but what that probably means is, and we are already seeing some of this in the more recent data from China is the production activity is likely to slow somewhat. We are expecting it to be what people tend to characterise as a soft landing so we still have annual growth rates in excess of 8% over the next two years but there is no doubt that that needs to be a contractionary force on that economy to try and slow this prospect of inflation.
GEOFF CANDY: Looking at that and putting that in the light of what's going on in the US and in Europe as well - there are a lot of macro concerns there as well. Clearly the overall production and if one still views copper as a proxy for economic growth then there has to be some concern at least in the short term about demand?
BEN WESTMORE: That's right and if you are looking at copper prices there is no doubt that the market has now factored in the big supply demand deficit over 2011 and 2012 in the physical market and prices have risen accordingly and now it really comes down to the macro picture and as you say people say that copper has a PhD in economics because it does follow macro economic trends very closely. We've seen the data out of the US, if you look at a construction sector which is a good proxy for copper demand out of that country. Both non-residential and residential construction in the US is still on a six month basis, the growth is still negative although it is improving or becoming less negative. Then you turn to China, you look at the construction sector there and although it continues to be quite strong, those paltry measures are having an effect and taking some of the heat out of the economy and of course we just have these overriding concerns around a further financial event - one most likely born out of the default in the euro area that could cause some uncertainty which just cause consumers of copper to stand back and see how things play out. So, on the demand side at the moment that the copper market is looking rather weak.
GEOFF CANDY: On the supply side and this is what is coming out, there almost seems to be two camps of thought with regard to the copper market, the first being that we've got these concerns and a lot of the price rises been as a result of concerns on the supply side rather than actual physical demand coming through and then on the other side of the thinking that demand is going to increase as production begins to increase and these economies eventually begin to recover and try to get inflation under control and those kinds of things. Is there any way to gauge which view is predominating at this stage?
BEN WESTMORE: It's a difficult one - most do view the demand picture from the emerging economies as continuing to be quite strong so if you take global growth in the aggregate over the current year in 2010 it grew by about 5%. That was predominantly focussed on the emerging economies and most do expect, if you take a more medium to longer term view that demand especially out of China and gradually India, as India also industrialises, is likely to be robust and is sustainable. On the supply side we have the well- documented story where copper ore grades generally are deteriorating. There is a lot of investment in exploration in copper mines going on at the moment and in the next three or four years you are likely to see some of that supply side response to stronger demand - but at the moment we have hit a soft patch of growth so I think the short term dynamic the demand element doesn't look like its there, but if you take a more medium to longer term outlook it is likely to be a pretty tight market over the next few years.
GEOFF CANDY: In terms of the rest of the base metals complex, how do you see copper ranked at this stage?
BEN WESTMORE: Looking at copper prices that sort of deficit has been priced in. If you look at it on a real basis across the base metals complex, copper is the only one where prices have now risen in real terms to where they were prior to the financial crisis and that seems to be pretty suitable for this sort of outlook in the physical market that we have got over the next few years. There's no doubt over the first two to three months of this year that copper prices did especially become a bit frothy and there was a lot hype around this physical deficit and may have sort of overshot on the upside in our opinion and in the next 18 months we do think the copper prices are likely to roughly consolidate. It's more a picture at the moment of when that demand response does come on line although we do expect the policy timing will have effect on emerging economy demand. Over the next 12 to 18 months there are those inflation pressures which are likely to be a bigger concern. If when we look how it sits relative to the other metals, we think aluminium prices are probably also a little bit overpriced at the moment, but looking across at other sections, we've got in particular nickel prices in the September and December quarter this year a little stronger and also we were expecting, as automobile production recovers and at the moment it's suffering from some short term scaling back of fiscal policy stimulus which is an act of the financial crisis, once all that production recovers we expect lead prices to start to pick up through the next few years. So in the base metals we wouldn't expect copper prices to rise by as much as some of the others.
