Metals to Rally This Year on Funds, China - Natixis

LONDON, Feb. 24 -- Base metals will rally this year as funds are set to maintain their buy-side bias, while strong Chinese growth will overshadow lacklustre growth in mature economies, according to Natixis. (CNAT.PA: Quote)

The investment bank said in a report this week metals continue to gain acceptance as an asset class, are increasingly used by funds to diversify their portfolios, and are seen as a play on China and on global economic recovery.

"Further investment interest in 2010 is likely to be generated by the acceleration in economic growth in Asian developing countries, as well as potential recovery in OECD economies. We therefore expect that investment funds will maintain their long-side bias," Natixis said.

"The only reasons for a degree of caution are the exceptional gains seen in 2009, which have left prices well in excess of marginal production costs. This could potentially lead to bouts of profit taking, but it is unlikely to precipitate a mass exodus from the sector."

Turning to lead, the best performing metal last year, Natixis said battery demand will remain strong this year, while supply in China will be restricted by tight supply of concentrates and environmental upgrading.

The bank lowered its average forecast for 2010 lead prices MPB3, however, to $2,565 a tonne from $2,700 in January. It also pushed down its 2011 forecast to $3,075 a tonne from $3,240 a tonne in January.

The average zinc price forecast for 2011 was also lowered to $3,060 a tonne from $3,220 in January. Zinc prices jumped 112 percent last year MZN3, and Natixis expects gains this year and next to total 68.8 percent and 9.3 percent, respectively.

On copper MCU3, the bellwether metal that gained a stunning 140 percent last year, Natixis expects the market to move from an estimated surplus of 393,000 tonnes in 2009 to a deficit of 142,000 tonnes in 2010.

"As a result of the improving fundamentals, we expect prices to ... average $7,885/tonne over 2010. The tightness will remain for the foreseeable future, and we forecast prices ... in 2011, averaging $8,476 a tonne." said the bank.

Natixis expects aluminium MAL3, the most widely consumed of all LME-traded base metals, to average $2,370 a tonne this year and $2,489 next year, up 42.1 percent and 5 percent, respectively. Last year aluminium jumped 45.8 percent.

On precious metals, by contrast, the investment bank is decidedly bearish, forecasting price falls in gold and silver next year of more than 10 percent.

"We feel the balance of probabilities favours an eventual resolution of economic imbalances, such that investor interest in gold and silver will gradually begin to unwind. We could also see the economic recovery gather pace .... undermining those store-of-value assets with low yields."