China Demand Still Key Commodities Driver

Strong Chinese demand will remain a key driver for a number of commodities this year, but the recent price falls in some highlight "the growing risk of a near-term peak in China-driven prices," Deutsche Bank said in its latest quarterly commodity price review.

For instance, Asian hot rolled coil steel prices have fallen to around $300 a metric ton from $400/ton in late January, correcting from the speculative buying in China ahead of the import quotas being reached, the bank said.

Despite this risk, and that to Asian growth from the spread of the severe acute respiratory syndrome, or SARS, mounting uncertainty regarding the Organization of Economic Cooperation and Development's economic outlook means Deutsche continues to "favor exposure to metals where China has a long-term net import requirement."

In particular, those commodities facing significant supply constraints, such as nickel, have a positive outlook, said the report.

Deutsche maintained its bullish outlook for nickel in 2003, lifting its forecast average price 6 percent to $3.68 a pound from the January report.

"Nickel remains our preferred exposure among the LME metals, with prices benefiting from tightness in the stainless steel scrap market, limited new capacity growth and regional demand strength in Asia," the bank said.

However, the bank cautioned that nickel's upside above $9,000 metric ton is capped by the selling of Russian metal.

The benchmark LME three-month nickel contract fell to a recent low of $7,690/ton March 27 from this year's peak of $9,140/ton Feb. 26 as Russia's Norilsk Nickel delivered about 13,000 tons of nickel cathodes from its 60,000-ton stock held as collateral for a bank loan.

Deutsche is maintaining its copper price forecasts from 2003 to 2005, but is bearish about aluminum's prospects, describing the market as remaining "plagued by overcapacity and a lack of producer discipline" despite recent smelter closures in Europe and the U.S.

As for gold, the bank said a forecast weakening in the U.S. dollar will provide a kick to the gold price in 2004 and 2005.

Deutsche's new gold price forecasts for 2004 and 2005 are 3 percent and 5 percent higher respectively from its last review issued in mid-January.

It now forecasts gold to average $325 a troy ounce in 2004 and $330/oz in 2005, reflecting its expectations that the U.S. dollar will assume "a progressive deterioration" in the trade weighted index to 92.6 in 2004 and 91.5 in 2005. Dow Jones