Base metals volatile in near term on market worries: Barclays Cap

Prices of base metals are likely to remain volatile globally in the current quarter (October-December), following "huge uncertainty and nervous trading conditions" in the market, according to a Barclays Capital report.

"Vastly different assumptions on the effects of high energy prices on economic growth and metal production costs have helped drive this large divergence in views. Traditionally, near-term supply forecasts are reasonably certain. Today, however, the range of supply growth forecasts is even greater than that of demand, which normally tends to be the more volatile part of the equation," it said.

The bullish trend is likely to continue, as "demand has strong potential to surprise on the upside, while supply additions are disappointing. Even with prices trading around multi-year highs (or all-time highs in the case of copper), there is more room on the upside," according to the report.Barclays recommends consumers and investors to buy on dips.

Inventories: Total reported base metal inventories on the London Metal Exchange are at an all-time lows. Barclays expects more inventory drawdowns in the fourth quarter on a seasonal pick-up in activity and as consumers are forced back to the market given their low stockpiles. Sheer physical tightness will continue to drive prices higher.

Demand: Robust global growth is expected to continue despite high energy prices likely in the coming year. In fact, US manufacturing activity appears to be accelerating faster than anticipated in the aftermath of the hurricanes, while the European and Japanese activity is also showing significant signs of improvement. Post-hurricanes reconstruction in southern US is likely to increase metals consumption.

High energy prices are the biggest concern and demand outlook depends more on them than China - the most important driver of metals demand.