Metals prices to take rollercoaster ride in '08

LONDON (Reuters) - Metals investors are poised for a bumpy ride next year, caught between a slowdown in the United States and uncertainty whether China can take up the slack.

A possible slowdown in U.S., the world's biggest economy, could slash demand for base metals, as well as have a knock-on effect on Asian economies.

But many analysts believe robust growth from China, the world's top consumer of base metals, will make up for any possible loss with its insatiable appetite for metals.

"The Western economies are clearly in trouble with the impact of the credit crunch," Sean Corrigan, chief investment strategist at Diapason Commodities, said.

"The question is how far downward the reverse slope extends."

Problems in the U.S. housing sector and financial institutions reporting losses due to their exposure to the risky U.S. subprime mortgage market have escalated worries about the health of the U.S. economy.

Dampened sentiment in the global equity markets, strongly correlated with industrial metals, coupled with fears about demand have slashed the price of copper by about 20 percent since the start of October.

"The strongest correlation of the Standard & Poor's index with any commodities is the industrial metals. Further declines in the global equities could be a problem," Michael Lewis, global head of commodities research at Deutsche Bank said.

"The risks of U.S. recession are manageable but they do escalate risks of contagion to Asia. But at this stage we are still relatively optimistic on Chinese growth next year."

China's statistics chief said in November he expected the Chinese economy to grow by around 11.5 percent in 2007 while a Reuters poll conducted in September showed a median growth forecast of 10.5 percent for next year.

DIVIDED

China accounts for a larger part of the world's copper consumption, but investment money from the United States could determine prices next year.

"A lot of the money is tied up in the United States," analyst Leon Westgate at Standard Bank said. "A lot of the funds are based there, too. The U.S. has a disproportionate impact on metal prices."

The dollar, on the other hand, hit by growth concerns and prospects of U.S. Federal Reserve cutting interest rates to shield the economy, is not likely to provide much support for metals.

"To some extent dollar weakness can be supportive for industrial metals at the margin, though the correlation of dollar to industrial metals is relatively weak," Lewis said.

The market seemed divided, with some analysts predicting a modest rise in metal prices, while some fund managers expect the market to stagnate in 2008. Volatility was the one theme which all agreed on.

"With inventories at low levels and the market clearly uncertain about the short-term outlook, volatility is going to be a be a pretty important issue, particularly early next year," analyst Daniel Hynes at Merrill Lynch said.

Lack of Chinese buying in the metals market has caused hefty rises of inventories at London Metal Exchange warehouses. But the fact that inventories are still at historically low levels could leave prices vulnerable.

"When you have inventories under a week's global consumption than you're going to get massive volatility," Hynes said. "Supply side shocks, if they continue, could have a significant impact on the market."

Copper concentrate production is estimated to increase 10 percent in 2008 to 13.6 million and the refined production is set to rise 7.2 percent to 19.3 million tonnes in the same period, according to figures from CRU Metals Consultancy.

(Editing by Michael Roddy)