MercoPress. South Atlantic News Agency

Rio Tinto forecasts continued bull market for metals in 2008

Rio Tinto CEO Tom Albanese

Mining giant Rio Tinto expects commodity prices to remain historically high in 2008 and well beyond in spite of the US economic slowdown, said on Wednesday chief economist Vivek Tulpule.

"It is arguable that even as negative sentiment in relation to the US economy and credit markets has continued to increase during 2008, the market's perceptions about the fundamentals in most resource markets do not appear to have been much affected", said Tulpule who added that "looking forward, it is entirely possible that some commodity prices have yet to reach their cyclical peaks". Tulpule insisted that Chinese growth is not expected to be significantly affected by any further slowing of the US economy and that even with a US recession Chinese growth is expected to remain strong in the 9-10% range and so create an environment for continued strong commodity demand. "It's important that we remain aware of the macroeconomic risks linked to growth in OCDE countries", added Tulpule who nevertheless pointed out that "it's also important not to exaggerate those risks because our models suggest there should not be a significant impact over the developing economies, which have been the growth engines for commodity demand". Rio Tinto's chief economist also pointed out to some problems on the supply side which he forecasted is likely to remain relatively constrained, because of a shortage of key equipment. "This means new projects will take longer to come on stream and power disruptions in southern Africa and China are also continuing to affect supply". The mining industry is also facing increasing cost pressures. Rio Tinto CEO Tom Albanese said that the pessimistic prospects towards the end of last year and early 2008 regarding metal prices has been very similar to what happened all along 2007. At the beginning of that year many people believed copper prices had reached their roof in 2006 when they shot to 8.800 US dollars a ton, "but last May, July and October, prices were again above 8.000 US dollars", said Albanese adding that "we are again seeing a repeat of the strong market conditions we witnessed at the beginning of 2007". The report on copper says that cconstrained supply conditions in the context of above average demand growth in 2008 and low metal and raw material stocks mean that copper prices are expected to remain elevated well above trend levels this year. Regarding aluminum, primary consumption increased in 2007 at its fastest rate in recent history, in the range of 10% to about 38 million tonnes. China accounted for most of the growth in demand last year, offsetting weakness in North America. However higher costs across a range of inputs and a stronger currency have increased the marginal costs of production in China. The aluminum forward curve continues to rise, which suggests the market is expecting stronger prices going forward. Rapid growth in Chinese demand for iron ore has led to sharp increases in the spot price. Rio Tinto anticipates that growth in supplies from high cost producers, which have filled the increasing gap between demand and low cost seaborne production, are expected to slow in 2008 since Chinese production has been affected by falling grades and Indian export growth is limited by port capacity. On the demand side, given ongoing strength in fixed asset investment growth in China and other developing countries, steel production is expected to grow strongly and in this environment of strong demand growth and constrained supply, the iron ore markets can be expected to remain and perhaps become increasingly tight.