Metals Update - Softer physical demand in play, supply-side issues still largely feature as positive price influence - JP Morgan

KEY POINTS
· We broadly increase our calendar 2011 price forecasts, reflecting largely a mark-tomarket exercise as opposed to a wholesale fundamental view change. The exception is copper, where we drop our 2011 forecast basis the absence of Chinese spot demand in 2011YTD and expectation for still subdued off-take in the near to medium term.

· The macro backdrop remains supportive for metals, in spite of headwinds from higher energy prices and the onset of fiscal austerity. Global GDP in 2011 is pegged at an above-trend pace of 3.3% in 2011 and 3.6% in 2012, with DM at 2.3%oya and 2.7%oya respectively, and EM at 6.0%oya over 2011-2012. IP – the main driving force for industrial metal consumption – is seen at 6.1%oya and 6.7%oya in calendars 2011 and 2012. Under such growth expectations the onus once again rests on the supply side to maintain steady capacity expansions, particularly in markets prone to tightness; copper, nickel and tin near term and (potentially) lead/zinc into the medium to longer term.

· We haven’t changed our gold forecasts materially from December. For the full 2011 calendar year we have increased our forecast by 2.5% to just above $1460 on average for the year. For 2012 we have bumped up the price forecast by around 7%, from around $1400 to around $1460. We have however made more material forecast changes to silver. We increased our average price forecast for silver from the $30 level in 2011 to around $35 for the full year and bumped up 2012 by around $3/oz as well.

· Overall we see the current underlying drivers of gold and silver investment demand – negative real interest rates in the US, ongoing geopolitical risk in Europe and bloated central bank balance sheets as supportive – and likely driving prices higher again through 2011. Gold is seen peaking over $1500 and averaging $1500 in Q4. Silver – already stretched on valuation – may yet move towards $45-$50 given relatively inelastic short term supply parameters but its ability to hold these levels without ongoing unprecedented investment allocations is limited.