The base metals bull has been running out of control for three years now, but the inflationary beast may be running out of energy. "Metals already are pushing back from previous highs," says analyst William Adams at BaseMetals.com. "This volatility means that the market is nervous." Thus, lower prices may be evident in 2006—especially if supplies of nonferrous metals do improve. But, since commodity prices have risen to new heights in 2005, the descent won't be smooth.

"We are expecting the world economy to slow down over the coming couple of years," says Douglas McWilliams, chief executive of the Center for Economics and Business Research in London. "So, since regional demand for base metals will be erratic, the impact on prices worldwide will be volatile and will depend on the elasticity of supply."

McWilliams points out that for those decades from the mid-1970s, the real price of non-oil commodities fell by 80%. So, it's not such a big deal to economists that the prices for base metals traded on the London Metals Exchange (LME) rocketed by 75% since the autumn of 2002. Of course, pricing volatility is a big deal for buyers.

Copper averaged $1.84/lb in October and actually reached an historic high spot price of $1.88/lb in London trading at the start of November. China's rapid industrialization—the development of electricity grids and telecommunications networks and the expansion of a transportation infrastructure—has been creating a new world demand center for copper. But copper is used extensively in North America and Europe as well, and purchases outside China have been much weaker than expected. Data from the International Copper Study Group in Lisbon shows global copper use off 1.2% in the first seven months of this year. Still, analysts believe demand will be around 14.5 million metric tons this year, just about what consumption was in 2004. For the year through October, copper is averaging $1.60/lb in the LME spot market. That's about 15% higher than this time last year. The mavens think copper prices will drop almost 15% in 2006—averaging $1.35 or so-as rising global production pushes the market into surplus. "We expect the copper price to remain volatile but at a higher level than in the recent past," says analyst Michael Gambardella at J.P. Morgan Securities in New York.

Aluminum demand has been weak this year and supply has been described as "roughly in balance" around 31.8 million metric tons—yet high prices have been supported by heavy investment by speculators and investment houses. Nine-month statistics from the International Aluminium Institute show world production is 3% higher than in 2004 while demand is moderating. Yet, LME sales prices early in November were at a near-term high of 91¢/lb. "Actually, the consensus on the outlook is mixed," says analyst Gayle Berry at Metal Bulletin Research in London. "The overriding sentiment emerging from the market's dominant players is that things are just okay—neither especially good nor bad; an ingot market heading sideways." The mavens think aluminum prices will drop almost 3.4% in 2006—averaging 80¢. Restructuring is widely discussed by ownerships of various aluminum-smelting companies but more as a financial move than a way to shutter high-cost production facilities. Alcoa, for example, has once again raised questions concerning the future of its 192,000 metric ton/year Eastalco smelter in Maryland if a new competitive power supply cannot be secured.

Mining constraints have been limiting production growth for smelted and refined zinc in the face of strong demand, especially from China. Basically, demand growth in the Asian region has partially offset the consumption decreases in North America and Western Europe. This has been keeping prices elevated since early in 2004. The western world refined zinc market will be in a 430,000-metric ton deficit in 2006, from a deficit of 272,000 metric tons in 2005, according to the latest data from the International Lead and Zinc Study Group, or ILZSG. A market analysis by AME Mineral Economics finds producers unwilling to jeopardize current profit margins by restarting suspended operations, creating a supply deficit. And, there still has been no clarification from the LME about the status of 248,575 metric tons of zinc stockpiled in New Orleans. So, some analysts see the global deficit continuing for the next two years and keeping prices high. Natexis Commodity Markets writes in early November that "the reduction in inventories should accelerate in 2006"—supporting price increases that have been forecast at 6.5% or higher. Zinc is the only base metal for which analysts agree on the price trending up—from 60¢ this year to 64¢ in 2006 and 2007. Zinc's price run from 39¢/lb in 2002-2003 has attracted interest of investment fund managers; which, in turn, keeps pricing bloated.

By early November, the year-to-date average of 43¢/lb was three cents above the previous record high set in 2004. Lead production has been surging this year, while demand has been patchy. Analysts are moderately bearish on future demand, however, and expect price values to fall back as supply begins to recover. The mavens think lead prices will drop by more than 11% in 2006 to an average 37¢. International Lead and Zinc Study Group figures show total refined lead output of 3.68 million metric tons in the first half of 2005, a 5.2% year-on-year increase—and much of it contributed by China. On the demand side, refined lead consumption was estimated to have risen just 3.9% to nearly 3.75 million metric tons. Lead is a one-product market: auto batteries. "Most of the metal's demand growth is coming from China, partly displacing battery production elsewhere," says Peter Kettle, nonferrous metals research director at CRU International in London. He points out that a highly efficient lead recycling system meets 70% of consumption requirements. "But, is there a 'right amount' of primary lead to 'top up' the supply system?," asks Kettle. Since there isn't a specific number, "we now are seeing the biggest rise in mine supply in decades." So, the western world refined lead deficit will shrink in 2006.

A lengthy period of growth in world stainless-steel demand came to an abrupt halt in the third quarter of this year. Up until then, nickel's supply had been tight and the price had been volatile. The price, which has increased by more than 100% since 2002, has been a major annoyance to raw materials' buyers at the world's stainless-steel producers. The metal averaged $6.84/lb on the LME through October. Now that fourth-quarter stainless steel production cuts are a certainty, spot nickel prices are below $7/lb. The Natexis Commodity Markets says that "prices have been under pressure since demand has been slowed by the concerted efforts of the stainless-steel mills to cut output to restore some health to that market." Other analysts say the stainless-steel market has not recovered sufficiently from the over-capacity that plagued it earlier in the year. And, stainless production cuts that have hit nickel demand in recent months look set to be rolled forward in 2006. AME Mineral Economics believes China will underpin global nickel demand growth in coming months. The Australian analysts believe supply will remain precarious until new large-scale mines and smelters go into production in 2007 in Canada, New Caledonia and Australia. Still, the consensus of the other mavens is that the supply surplus will continue in 2006—cutting nickel prices by 15% to an average $5.79.

High supply and a demand environment described as "fairly stagnant" and "surprisingly weak" are weighing down tin's pricing. The electronics industry's move to lead-free solders will stimulate tin demand sometime in 2006. But, for now, the purchases are falling so there is too much supply—as evidenced by world surplus of 29,000 metric tons, or 6.5 weeks of expected demand of 237,000 metric tons. Expanded production has accelerated in Indonesia and elsewhere in Asia, says Natexis Commodity Markets. After hitting a cyclical peak last year, tin has slipped by 12% to a 10-month price average this year of $3.43/lb. Looking ahead at prime-grade metal, the mavens see a 6.6% decline next year. In fact, "tin prices are now at risk of dropping as low as the $2.72/lb level if bearish market signals persist," says analyst Berry at Metal Bulletin Research. That may take a couple of years, she and other analysts write, as the marketplace reacts to all that new production capacity brought on-stream because of investment exuberance over the 2004 peak price.