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MINING STOCKS - Base Metals

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Of Note:

It's not too early to look for some stabilization.

A declining U.S. dollar provides some price support for metal prices, helping to offset the weak demand.

"If it continues then there will be stronger reasons to buy some of these metals,"

"Base metals [with the exception of copper] are trading at prices below their cost of production,"

"- the metal prices are moving sideways - the markets may have absorbed the negatives."

All that's needed is growth in demand or supply disruptions to allow some recovery in metal prices.


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Some signs base metals are bottoming out

ALLAN ROBINSON

November 10, 2008
Globe and Mail

The base metal sector has been hit hard by the recession and commodity prices have plummeted, but it's not too early to look for some stabilization.

About the only good news for the sector has been the recent weakness in the U.S. dollar following its incredible surge of more than 20 per cent during the past four months. A declining dollar provides some price support for metal prices, helping to offset the weak demand.

"This base building has been going on for a couple of weeks now and while two weeks is not enough to get excited about, if it continues then there will be stronger reasons to buy some of these metals," said Robert Tebbutt, vice-president of Peregrine Financial Group Inc., a corporate risk management company.

"Base metals [with the exception of copper] are trading at prices below their cost of production," Mr. Tebbutt said. He is looking for a "trading bounce" as the metal consumers, who bought too much going into the peak of the market on July 11, wind down their selling.

In addition to the slowing demand, the downward pressure on metals such as copper, zinc, lead and aluminum has been acerbated by the unwillingness of banks to provide financing, Mr. Tebbutt said. "If banks were as loose with their money as they were last year, the slowdown would not be as bad as it was," he said. "At some point in the very near future, and we may have already reached it - the metal prices are moving sideways - the markets may have absorbed the negatives."

Chinese smelters are cutting copper production, while Aluminum Corp. of China Ltd. has been making significant production cuts and has indicated a willingness to make further reductions if prices remain depressed. Likewise, mining companies such as Freeport-McMoRan Copper & Gold Inc. are postponing expansion projects.

All that's needed is growth in demand or supply disruptions to allow some recovery in metal prices.

And that can't come soon enough for investors. The HSBC North American Mining index, a market capitalization-weighted index, has declined 65 per cent since mid-July.

WHAT ARE THE EXPECTATIONS?

"In our view, metal demand arising from the ongoing industrialization of China should underpin metal prices going forward," said John Redstone, a metals and mining analyst for Desjardins Securities in a report to clients.

Nevertheless, the credit crisis, which has choked off economic growth, remains a key concern for the recovery of the metal markets, Mr. Redstone said. "Metal markets worldwide continue to monitor the ability of metal consumers and producers to access credit markets as the first step to purchasing metal," he said.

Interbank lending rate spreads remain extremely high, indicating an unwillingness of banks to lend to each other. "As a result, metal consumers, producers and traders are continuing to find it difficult to secure short-term credit financing for metal purchases," Mr. Redstone said.

http://www.theglobeandmail.com/servlet/story/LAC.20081110.RBELL10/TPStory/Business


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