<p><a target="_blank" href="http://www.ft.com/cms/s/0/d3529774-995b-11dc-bb45-0000779fd2ac.html">Dr. Copper</a> speaks.</p>
<p>Base metals have come under strong selling pressure in recent weeks amid growing concerns over the possibility of a US recession and knock-on effects in the rest of the world. News that the Chinese government plans stricter controls over new investment projects has heightened concerns about further price weakness.</p>
<p>The S&P GSCI industrial metals price index has fallen 9.4 per cent this year, sliding almost 25 per cent below its 2007 peak in early May.</p>
<p>The deterioration in sentiment has been dramatic. As recently as early October, participants at London Metal Exchange week, the largest industry gathering of the year, met against a backdrop of record levels of investor interest to discuss the potential longevity of the strongest bull market in a generation. Since then, the continued deterioration in the US housing market and the weakening of global industrial activity have prompted a reappraisal.</p>
<p>John Kemp of Sempra Metals says: “We’ve seen a general darkening of the macroeconomic outlook, a deterioration in risk appetite, a broad repricing of assets and increases in metals supplies, and this has left the base metals complex dancing in thin air.”</p>
<p>Goldman Sachs estimates that a one percentage point decline in the pace of global industrial activity corresponds to a fall of about 9 per cent in most metals prices.</p>
<p>Mr Kemp says that, as base metals markets are relatively small, liquidity is an issue. Hedge funds trying to exit large long positions (bets on further price gains) in copper, lead and zinc have put severe downward pressure on prices.</p>
<p>The decline in spot prices has led to significant shifts in most metals futures curves, which have flattened from steep backwardation (spot prices above forward prices suggesting tight supplies). Zinc has been the most notable casualty, falling almost 47 per cent this year. Stephen Briggs of Société Générale says zinc prices could slide below $2,000 a tonne from its current level of $2,237 a tonne, reflecting increasing supplies.</p>
<p>Global zinc mine production could increase by at least 18 per cent between 2006 and 2008, according to Mr Briggs, who is forecasting a supply surplus of 250,000 tonnes next year.</p>
<p>Copper, the bellwether of the base metals sector, has fallen almost 19 per cent since the start of October because of a substantial increase of almost 55,000 tonnes in LME stocks.</p>
<p>Concerns that the Chinese government may impose restrictions on investment spending and fears that prices have further to fall have stopped many traders from buying. An absence of Chinese buying interest has been noted by traders in London in recent weeks. But James Gutman at Goldman says: “Worries over a pause in Chinese manufacturing and construction growth are still only worries.”</p>
<p>Amid the gloom, analysts at Deutsche Bank are relatively upbeat. “We remain convinced that this environment provides good buying opportunities across the complex as our economists have yet to forecast a full-bore recession but, instead, see a more restrained slowdown in the US economy in 2008.”</p>
