>METAL & MINING: Q1 2010 (HSBC)

Commodities have started the year strongly. The success of global stimulus packages, cheap credit and dollar weakness fuelled a doubling of the HSBC Metals index in 2009. With global economies set to continue to recover and the dollar forecast to remain weak, we expect metals and bulks demand to remain well supported.

Too strong, too soon

At current levels, however, we would not be chasing commodities. While we have raised our 2010 price forecasts by 13-30% for metals and bulks, our estimates indicate a 10-15% fall from current spot levels. The biggest threat, in our view, lies in the impact of governments globally, particularly China, winding down stimulus packages. Rebounding metals supply is a further concern. At current prices, we believe that virtually all aluminium, copper and zinc producers are making money. This should ensure that meaningful surpluses remain over 2010-11 in these markets.

Our preference remains in bulk commodities, where China’s import dependence continues to grow. Recent spot pricing strength highlights the current tightness in iron ore and coal markets. Against consensus estimates for 2010, we are now broadly in line for copper, zinc and nickel but remain lower for aluminium (-5%). In the bulks, for 2010 we are higher against consensus for coking coal but in line for iron ore and thermal coal.

To read the full report: METALS & MINING