TORONTO (CP) -- It's not different this time, debt-rating agency DBRS is warning investors who think that the boom in base-metal prices still has much higher to go and reflects a fundamental long-term change.
Prices for base metals are more likely to decline from current historical highs in the medium term than to rise further or hold the gains of the past four years, DBRS says, cautioning of the ''transient nature'' of such booms.
''While unusually strong demand conditions seem set to maintain upward price pressures through 2007 and possibly 2008-2009, the supply response could assert itself within a three- to five-year time horizon,'' the agency said in a commentary released Tuesday.
And, it warns: ''The historical record suggests that the boom will end at some point, but may not end gently.''
Metal prices ''are following a familiar pattern, driven by the same underlying supply-demand factors that tend to repeat themselves in each price cycle,'' it says, while noting that recent prices have risen faster and stayed high longer than in previous cycles.
After more than tripling since 2003, a price index tracking copper, aluminum, iron ore, tin, nickel, zinc, lead and uranium is likely to revert to its ''historical pattern of high cyclical volatility and downward long-term trend'' in inflation-adjusted terms, DBRS says.
The boom has been powered by strong global economic growth and surging demand, particularly in China, but ''just as in past cycles, downward forces on prices from increased supply and slowing demand growth eventually will reassert themselves,'' said DBRS chief economist David Roberts.
The agency's study says the boom ''largely reflects a cyclical upswing, although of greater amplitude than in the past,'' while production costs ''remain far below levels justified by current metals prices.''
Global interest in Canadian miners has grown, resulting in the foreign acquisition of such base-metal leaders as Inco Ltd. and Falconbridge Ltd. over the past year. And several other deals are in the works.
But the large upside for metals ''does not merit a conclusion that the down side of the cycle has been permanently banished,'' DBRS says.
Additionally, studies show that ''base-metal prices slump on average for longer periods of time than they boom'' and ''the average price decline in a slump is slightly larger than the average price increase during the boom.''
After the bonanza of the past few years, ''one can reasonably expect that when prices eventually decline, they will do so more rapidly and slump for a longer duration than in previous cycles.''
The DBRS study notes that growing economies like China and India use more base metals early in their development as they build up factories, highways and other infrastructure.
Additionally, ''even a relatively modest decrease in Chinese growth from 10% to a still very strong seven per cent would result in a significant easing in base-metals demand growth.''
The commentary says supply increases slowly in the short run - typically taking five years or more to catch up with demand - due to the high costs of developing new mines and expanding processing plants.
''This implies that it will not be until 2009-2010 that we see a significant supply reaction to the current boom beginning to reach markets.''
When that happens, the potential for a tumble in prices is particularly important for countries that depend on base metals for a large part of their exports and government revenue, DBRS counsels.
Public bond issuers that are spending their windfall gains ''will find adjustment to lower metals prices difficult to manage.''
(c) The Canadian Press 2007
