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Year of Base Metals

With spot metal prices having risen above their annual
forecast for 2006 Macquarie has reviewed its estimates,
resulting in strong upgrades to its metal price
forecasts both this year and next year.
The broker notes its higher forecasts reflect the
likelihood the inflow of funds into the metals sector
from commodity fund and index buying will continue and
will support a higher profile for metal prices in the
medium-term.
Supporting its view, the broker also notes the demand
side of the equation remains very tight as constraints
continue to limit any substantial supply response.
Acknowledging the current environment is difficult for
attempting to forecast metal prices, the broker offers
as an example the fact its copper price estimates have
risen by 100% in the past year or so.

 The broker has upgraded its nickel price forecast in
2006 by 17.8% to US678c/lb, while in 2007 it has lifted
its forecast a further 13% to US650c/lb.
Even larger upgrades have flowed through for copper and
zinc, the broker lifting its copper price forecast this
year by 37.5% to US220c/lb and its zinc estimate by
46.9% to US118c/lb, with similar increases flowing
through in 2007.
Lead has also been upgraded significantly, the broker`s
2006 estimate increasing 46.7% to US55c/lb, while the
increase for aluminium is less substantial, rising 14.3%
to US120c/lb.
In share terms the broker suggests there should be a
change of focus by investors, as while last year was the
year of the bulks given higher iron ore and coal prices,
this year should be the year of the base metal
companies.
The broker suggests investors remain modestly overweight
resources and while quality plays such as BHP Billiton
(BHP) and Rio Tinto (RIO) should still be in portfolios
the focus should be on companies with high asset quality
and leverage to its preferred base metals of aluminium
and zinc.
The broker`s preferred stocks therefore are Alumina
(AWC) as a quality, leveraged aluminium play and Oxiana
(OXR) and Kagara Zinc (KZL) for their copper and zinc
exposures.
Copyright Australasian Investment Review.

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