In their recent "Commodity Compass," UBS analyst Daniel Brebner, economist Jan Stuart, strategist John Read, and associate analyst James Luke suggested, "there is growing evidence to suggest that much of the concern regarding global consumption growth is now largely factored into current commodity prices levels that the supply issues which have been a key causal factor in pushing prices higher over the past several years are being ignored."

"We believe that, with lower commodity price levels, consumption could respond to more attractive pricing and recover modestly," they added. "Furthermore, the problems with respect to supply growth remain and are likely to be recognized over the next several quarters, potentially supporting higher pricing."

ENERGY

The UBS team is positive about thermal coal and uranium markets. With thermal coal now trading at around US$162/t, UBS expects catalysts "to remain broadly supportive over the next several quarters" as both Vietnamese and Chinese coal exports fall and Indian imports "grow significantly."

UBS noted that uranium trading activity "has picked up significantly over the past quarter" as uranium now trades at about US$64.50 per pound. "Continued supply side problems (recently evidenced by a further delay to Cameco's Cigar Lake mine due to water problems), and strong long-term fundamentals could see further strengthen in the market in our view."

On Friday Cameco asked the Canadian Nuclear Safety Commission for a postponement on a September 18th hearing to amend a construction license for the Cigar Lake project, as well as deferral of a September 24th update on Cigar Lake.

PRECIOUS METALS

The UBS team's outlook for gold, silver and PGMs were all positive. "With a solid floor around $800-820/oz we believe gold will trade towards $900/0z over the next month or two and could trade much higher still."

The team suggested that "silver has sharply underperformed gold over the past two months, evident when looking at the gold: silver ratio which increased to the highest seen since late 2006 at about 62. We believe speculative and investor selling was behind this move and silver is likely to outperform gold on any rally in precious metals. But this is only due to speculative buying."

"We have seen much less fundamental demand in silver than gold so our review that silver will out-perform gold is not a high conviction call. Silver is a more volatile metal than gold, especially during corrections and investors should be aware of this," they added.

Now that the disinvestment pressure has eased for PGM, UBS expects platinum and rhodium to recover some lost ground, "although neither is likely to capture the euphoric highs of about $2300 and $10,000/oz, at least not this year. Palladium will probably trade higher in sympathy, although the metal is less supported by supply and demand fundamentals and more by investment demand."

INDUSTRIAL METALS

UBS has a positive outlook on both nickel and zinc, a neutral outlook on aluminum, and negative outlooks for copper, iron ore, and steel.

Despite very poor current demand for stainless steel, UBS asserted there is evidence that nickel prices may have hit bottom at $8/lb or $17,500/t. The team noted Xstrata's suspension of operations at the Falcondo mine as evidence of supply response to low prices. Meanwhile, pressure is mounting on nickel pig-iron production in China. "Our estimate of marginal industry cost is US$8.50/lb or US$19,000/t."

UBS also noted that zinc demand "remains reasonably moribund, however supply is beginning to react to the low pricing environment now being experienced. ...Our estimate of marginal industry cost is US$0.80/lb or US$1,800/t."

Cost increases and falling power availability could impact aluminum production in China, according to UBS's analysis. "We estimate marginal industry costs reside at about US$1.25/lb. or US$2,800t."

Meanwhile, UBS declared that "copper represents our least preferred metal over the short term," citing continued Chinese destocking of copper over the next several months which could pressure pricing. "Nevertheless we expect prices to recover in 2009 as long-term supply-side constraints are once again factored in by the market."

Increased production from Australian producers, high inventories at Chinese ports-combined with iron ore production growth and slowing steel consumption in China-has tempered UBS's enthusiasm for iron ore. "We expect that over the next several months spot iron ore prices could continue to weaken (spot prices are currently about 35% higher than contract prices (landed in China). We currently forecast a 10% increase in contract prices for 2009."

The UBS team predicts that steel prices will peak in the third quarter and soften by €100/t (US$146/t) into 2009. "Nevertheless, we expect prices to be supported given: inventories are close to normal rather than excessive; slower but robust demand from developing world (65% of total demand), high raw material prices to drive continued steel supply discipline as prices fall; marginal industry cost indicated HRC price support at around US$750-800/t."