London, 11 February 2011

BarCap: "In a fashion that would have an explorer green with envy, the metals are entering unchartered territory this year. Already, there have been a series of firsts, with new landmarks being set along the way. Copper has broken through $10,000/t, tin is well above $30,000/t, palladium is challenging ten-year highs, while aluminium and gold physical premiums are scaling record and multi-year highs, respectively."

Also, importantly, the market has a newfound confidence in global economic growth. The perception that a wave of speculative money is the driving force behind the run-up in base metal prices is misplaced, in our view.

Data show that some investment vehicles have in fact had outflows (such as physically backed ETFs), while CTFC and LME open interest data show that there is not a significant overhang of long positions. However, there is appetite from all segments of the industry to participate in the metals space this year.

We are now at a crossroads, with the market in anticipation of a big pickup in buying and buyers in hope of lower prices; something will have to give. In particular, we will be watching for the quality of physical market indicators, not least LME stock trends and those relevant to the Chinese market, to improve.

For now at least, the market appears to have come to terms with weakness in China’s post-holiday import buying, although we still view this as a short-term downside risk to prices. The road ahead is one less travelled, which means that price volatility is likely to remain elevated.

But something is brewing, and we believe it is the beginning of a big increase in demand, which, together with a newfound confidence in the sustainability of economic growth, leads us to believe the route being mapped out is one of higher prices. For metals with positive fundamentals and whose market balances continue to tighten, we have revised our price forecasts higher to reflect this.

Out in front, and by a big margin, are the trailbreakers copper and tin. With stocks-to-consumption ratios for these metals forecast to fall to record lows, set against a market with newfound confidence, we believe that prices will rise much further still, with copper prices expected to average more than $13,000/t by the end of the year.

High prices have sparked discussion about the demand erosion that could be caused by substitution, which we look at in this month’s focus section – see below for more.

Ends --

Commodities Now

By Gayle Berry, Suki Cooper & Roxana Mohammadian Molina et al .... For more contact Barclays Capital Commodities Research: www.barcap.com