Copper seen firm late '07, weak in near term

SINGAPORE, Jan 8 - Copper prices will see renewed strength late in 2007 as global growth picks up, but bearish sentiment will prevail in the near term, investment bank Goldman Sachs said on Monday.

"While prices in the interim are likely to remain volatile, we continue to believe that prices will see renewed upside momentum towards the end of 2007 and the beginning of 2008," Goldman Sachs said in weekly commodities note.

It added that renewed demand and supply constraints would tighten the market in late 2007 and into 2008.

Three months London Metal Exchange copper futures fell to $5,465 a tonne on Monday from $6,330 at the end of 2006 and a record high $8,800 in May as slowing economic growth propspects and rising stocks in exchange warehouses prompted fears of a supply glut.

"We believe the recent price declines reflect the market's coming to terms with the near-term fundamental softness," Goldman said.

Stocks of copper on the LME have risen nearly 50 percent since mid-October to 195,775 tonnes and are up over 600 percent from the cyclical low of 25,525 tonnes touched in July 2005.

But the report added that it did not see a significant risk of a hard landing by the global economy, citing recent economic data from the United States and a strong decline in Germany's unemployment rate.

"We expect the metals markets broadly to remain soft in 2007, consistent with the easing demand environment, but the longer-term supply side constraints to remain in place, and demand to likely once again pressure supply in 2008.

"A large supply disruption or a surge in demand, perhaps related to Chinese stockbuilding, could quickly push the markets back into deficit."

Goldman expected zinc to come under pressure because prices did not reflect the slowing demand picture nor the potential for substantial restarts of mine capacity and substitution.

In aluminium, Goldman said the market was likely to benefit from marginal substitution out of copper and zinc, but the same slowdown in economic activity that had weighed on other markets would trim demand.

The supply outlook was more bearish.

"The recent collapse in alumina prices, reflecting a surge in availability, is likely to allow the restart of substantial idle smelting capacity in China, North America and Europe."

It expected price support at $2,350, versus $2,560 on Monday, based on the higher costs for marginal producers.

From 2009 tighter alumina availability and smelting capacity would add to the metal's upside potential.