Metal prices could spike as supply set to fall

By Peter Murphy

SAO PAULO (Reuters) - Metals prices could spike when slowing demand eventually recovers because the time lag in raising mining output would limit supplies, a mineral resource consultant and policy adviser said on Tuesday.

"Perhaps in two to three years we could see another market under-supplied again and have fast metals price rises," Magnus Ericsson, co-founder of commodities consultancy Raw Materials Group, told Reuters.

Prices for most mineral resources have tumbled on fears a global recession and slowing growth in China, a major consumer of metals, would reduce demand.

Nickel, one of the biggest casualties, now costs just a fifth of what it did in May 2007, and the price of copper has more than halved since hitting a record high of $8,940 per tonne in July this year.

In response, mining firms such as Brazil's Vale said they would reduce output at operations around the globe while small firms are likely to be left high and dry without bank loans to explore and exploit new sites.

"In the long term my view is positive and in the mid term I see the possibility of another metal price boom rather than the opposite," Ericsson said by telephone from Belem in northern Brazil where he was scheduled to speak at a mining conference on Tuesday.

With a vast territory and a host of different metals in its soils, Brazil is a major world mineral supplier. But miners' enthusiasm to exploit new resources being found in areas such as Brazil's northern Para state is cooling.

Small firms with less cash will likely have to put their plans on hold after the credit crisis squeezed loan availability. But when the credit freeze thaws, the time taken to crank up supply could cause a shortage of some metals.

"From the time that you really have found something to making it into a mine can be eight to 10 years. If the supply response isn't continuous we will have price spikes and we will see more price volatility," he said.

Ericsson said development of new projects already started was likely to continue because the scenario might be different after the year or two that would elapse by the time they were ready to produce, but those which had not begun were more likely to be shelved.

With strong growth and a huge population, China has been one of the main drivers of the metals and commodities boom over the last few years and its economy continues to grow even though growth is now seen slowing.

"Demand is still strong. The supply side with the sharp drop in exploration is maybe a bit dangerous in that a lack of new deposits could develop very soon," he said.

(Editing by Jim Marshall)