By Chris Shaw

Spot prices for hard coking (metallurgical) coal have fallen since April and now stand about 25% lower than their peak in that month of US$240 per tonne. The change in prices is enough that Goldman Sachs now suggests its forecast of contract prices remaining unchanged in the fourth quarter of this year is a best case outcome rather than a base case scenario.

In the view of Goldman Sachs, the ability of miners to avert a fourth quarter price cut for hard coking coal hinges on the sustainability of steel production growth in both Europe and Asia. China has proven to be a price sensitive buyer of Australian hard coking coal, which implies the September period will be a weak period for shipments of Queensland material to China.

Outside of China, Goldman Sachs notes spot coking coal prices have picked up of late but there have been some recent market reports of delays to restarts in Europe and requests to delay deliveries from some Asian mills. In the broker's view this trend doesn't bode well for miners leading into fourth quarter price negotiations.

In National Australia Bank's view, exchange-traded bulk commodity prices have also weakened in recent months on the back of an easing in world steel production growth and uncertainty in financial markets. The bank still expects prices in quarterly contract terms will increase further in coming periods before a supply-side response weighs on prices in 2011.

Even assuming a supply response, NAB expects continued strong growth in Asian steel production in coming years will support bulk commodity prices around current levels, particularly as expected Chinese GDP growth of 9-10% this year means its domestic iron ore industry won't be able to keep pace with demand.

It is a similar story in coal markets, where prices for thermal (power production) coal contracts are expected to continue pushing higher in NAB's view thanks to strong import growth from both China and India that will only be partially met by increased production from Australia and Russia.

The bank's iron ore price forecasts stand at US$151 per tonne in the September quarter and US$140 per tonne in the December quarter, while in 2011 it expects quarterly prices of US$150, US$155, US$160 and US$160 per tonne.

For hard coking coal NAB is forecasting prices of US$225 and US$236 per tonne in September and December this year and US$248, US$236, US$231 and US$226 per tonne for the four quarters of next year, while for semi-soft coking coal prices are forecast to range between US146 and US$163 per tonne between now and the end of next year. Thermal coal prices are forecast to average US$98 per tonne between now and March, rising to US$108 per tonne for the final three quarters of 2011.

There are some bearish signals emerging in the copper market as well, UBS noting merchant premiums for copper in China have fallen sharply this month to a four month low of US$70 per tonne. In UBS's view this is a bearish signal for copper not only in China but for the global market, the latter because outside of Chinese buying there are few drivers of the copper price at present.

As the broker notes, the Chinese market depends heavily on imports to support its total copper supply, so metal traders are important in that market. These traders have withdrawn from global markets of late, thus undermining the Chinese merchant premiums.

UBS suggests these traders will at some point in coming weeks need to re-engage the market, the most likely point being when the LME/Shanghai Futures Exchange price differential returns to parity.

This would signify unusual trading activity as it would mean the industry failed to properly re-stock in the first half of this year given uncertainty over the direction of government economic policy. To UBS this means an increase in copper price volatility in the second half of 2010 as traders buy when the price differential is close to parity and sell when when it moves to a large discount.

Looking at base metals generally, National Australia Bank expects prices should maintain current levels for the next few months before re-stocking activity picks up in Asia and global demand generally becomes more robust.

Headwinds such as a lack of fiscal stimulus, weak labour markets and further de-leveraging will remain, but longer-term the bank is confident the recovery in China is sustainable. This will be a positive for metal prices.

NAB is forecasting quarterly average base metal prices in US dollars per tonne for aluminium of $2,000 in September, $2,030 in December, $2,061 in March of next year, $2,084 in June, $2,102 next September and $2,121 next December.

For copper the bank is forecasting prices of US$6,820 and US$7,028 per tonne for the September and December quarters of this year, rising to US$7,243, US$7,380, US$7,500 and US$7,613 through the four quarters of 2011. For nickel the bank's quarterly forecasts stand at US$19,742 and US$20,337 per tonne for the final two quarters of this year, then Us$20,951, US$21,372, US$21,694 and US$22,021 per tonne for the four quarters of next year.

For lead National Bank is forecasting US dollar per tonne average prices of $1,857 in September and $1,896 in December this year, rising to $1,936, $1,962, $1,979 and $1,997 for the March to December quarters of next year.

NAB's zinc price forecasts stand at $1,862 and $1,907 per tonne for the third and fourth quarters of this year, rising to $1,853, $1,989, $2,019 and $2,049 per tonne though the four quarters of 2011.

With respect to gold, NAB notes the upward movement in the metal's price has slowed as weaker investment demand has come at the same time as a decline in financial market volatility. Demand from the jewellery sector has also slowed at current higher prices.

As with the base metals, NAB expects gold prices should hold around current levels in coming months before a recovery in jewellery consumption next year gradually pushes prices higher. Investment demand should also continue to be of more importance as investors are expected to continue to maintain a preference for less opaque assets in the aftermath of the Global Financial Crisis.

National Bank's gold price forecasts in quarterly price terms stand at US$1,197 per ounce for the September and US$1,214 per ounce for the December quarters of this year, rising to US$1,237 per ounce in the March quarter of next year. Prices should then flatten out, as evidenced by quarterly forecasts of US$1,241 per ounce in June, US$1,237 in September and US$1,240 per ounce in December.

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