Will precious metals prices continue to rise?
LONDON, England - April 25, 2010 - After a brief tumble in February on fears that the Chinese economy was overheating, commodity prices resumed their upward trajectory. This has ensured mining shares kept moving higher - until two weeks ago.
As sector worries persist, is the relentless charge forward for miners sustainable - or are future earnings now fully priced in?
When it comes to commodity prices over the next few years, the supply-demand equation is important.
The rapid development and gentrification of Asian nations continues - and countries like China and India will continue to suck in raw materials. This creates a bullish outlook on the demand side of the equation for many years to come. However, if the supply side of the equation keeps up with demand, future price rises are unlikely. So, what is happening to supply?
The financial crisis and consequent plunge in metals prices resulted in many operations being mothballed - particularly the high-cost mines. This took a lot of supply out of the system. However, the rebound in prices over the past year means there is an incentive to restart these facilities.
"Since a brief trough in February, metal prices have staged a strong rally, taking prices up by 22%-50%," notes Daniel Kang, HSBC's head of mining in the Asia Pacific Region. Kang says metals prices now sit comfortably above marginal production cash costs. "While maintaining a positive medium-term view, we believe idled capacity should soon find its way back into the market, placing pressure on elevated metal prices," he argues.
