In their Global Commodities Review, Morgan Stanley continues its theme " "Higher For Longer". Download MS Global Commodities Metals Prices Review dated Oct 5.

Here in a nutshell is the rationale from Morgan Stanley.

"We continue to believe we are in a new supercycle. Its primary drivers are the industrialisation of the world's largest country (China) and a mining industry that faces unprecedented supply issues as a result of systematic underinvestment due to a 30-year strategy of repositioning for continued slowing demand growth. This very powerful combination has been enhanced by the "rebirth" of commodities as a financial asset class in the past 12-18 months. It has been estimated that pension and mutual funds may have invested US$120-150 billion in commodities to date, as part of a portfolio diversification strategy, and that significant further funds remain to be invested.

It is the combination of these three factors that is set to drive the "higher for longer" theme for a number of years, although of course we expect pauses and "bumps in the road". The sharp pullback over the past 4-5 months is just such a pause, in our view, with unwinding of linked trades (US dollar/oil/gold/base metals) driving significant selling by momentum-focused investors. The trigger for the sell-off has been in creased investor concern about the US and global growth outlook for 2007, and fears about rising inflation and interest rates. However, we believe these fears are overdone, and that a transition in the growth mix is under way.

The US consumer looks set to take a break after his long spending spree, to be replaced by European, Japanese and other Asian consumers. We also expect an increase in business spending due to the very high levels of cash on corporate balance sheets, while the overall effects of globalization should cushion the impact of the US housing slowdown — a view recently embraced by Stephen Roach (Global Comeback:First Japan, Now Germany, 2 October 2006). Meanwhile, China's industrialization and urbanization programme remains firmly on track, with the current five-year plan (unveiled in March 2006) shifting the investment focus from the coastal strip to the second- and third-tier cities inland.

;we believe there is a growing case for a 4Q rally in commodities, driven by increased Chinese buying following heavy de-stocking over the past 6-9 months (particularly in copper), coupled with even tighter markets as stocks continue to fall, the ongoing risk of more strikes and supply disruptions, and the possibility of renewed fund buying."

The highlights of this report:

Supply-side issues and production shortfalls remain the critical theme — supply is 3-5 years behind demand

Markets remain extremely tight with historically low stock levels, which are set to decline further in 2007

Copper, nickel, iron ore, and thermal coal are our preferred commodities; still bullish on zinc, but outlook is less stellar

Price forecasts selectively upgraded, but aluminium, alumina, and coking coal downgraded for first time in 4 years

We expect a 4Q rally in commodities to be driven by increased Chinese buying (restocking) and further strikes, but unexpectedly strong growth in domestic Chinese production has increased risk levels

Comments about copper:

Copper prices driven by best-ever fundamentals

Inventories to remain at record lows for next 2-3 years

Supply-side problems endemic; more losses expected

Price forecasts raised to $3.50/lb in 2007 and $2.80/lb in 2008; long-run price increased to $1.50/lb

Sharply higher Chinese buying in 4Q expected to drive prices to re-test $4/lb level before year-end

Comments about aluminum:

Reducing 2006-08 aluminum price forecasts to $1.15/lb (-8%), $1.05 (-16%), and $0.95 (-5%)

Long-term price estimate ($0.80/lb) unchanged based on expectations of structurally higher costs and consumption growth in emerging economies

Supply surplus in 2007: increased alumina availability should trigger typical response to high aluminum prices

Chinese alumina capacity expanding rapidly as new entrants build refineries in 10 months vs. 2"3 years in West

Comments about alumina:

Rapid Chinese refinery capacity expansion leads to global surplus

Alumina spot price is particularly vulnerable given China's key role in spot market. We have cut 2007e-2009e spot prices by 12%-24%

Contract price linkage ratio also drops back to its historical range due to weakening bargaining power with aluminum smelters

Comments about nickel:

Raising price forecasts across the board

Long-term price increased 18% to $5.00 per pound

High prices have been balancing an undersupplied market since early 2004, with no end in sight

Majority of new production from greenfield nickel projects now expected to start in late 2008 based on delays

Efforts to reduce primary nickel consumption are being offset by new stainless capacity in China, tight scrap supply, and robust demand from key non-stainless applications

Comments about zinc:

Plunging LME stocks have underpinned zinc at the $1.50/lb level over the past 4-5 months

Deficit forecast for next 18 months, stocks to reach record lows of 1.3 weeks in 2007

Risk of higher-than-expected Chinese mine production has tempered the outlook for zinc to a degree

Extremely tight markets, mine supply disappointments likely to have disproportionate impact on prices

Comments about iron ore:

Sharp rise in Chinese production has dampened sentiment, but growth rate appears unsustainable

Chinese steel production remains far above expectations and has absorbed all domestic ore

Market remains very tight; we expect prices to increase by 15% in 2007 and to roll over in 2008

Long-term price raised by 14% to $40/t to reflect ongoing capital and operating cost pressures

Comments about steel:

JFY 2007-08 price forecast lowered to US$105/t

New projects likely to result in supply surplus

Chinese net imports are declining sharply

Description of ModelWare (â„¢)

Accounting summaries today are extremely complex. Moreover there are different accounting standards used (GAAP and International). So, Morgan Stanley has created a software called ModelWare that ostensibly puts the data on a level playing field.

I recommend you read their description of this product.

Morgan Stanley has produced an excellent report on the leading miners of Europe. Download MS Oct 5 Metal Miners of Europe.

Unfortunately, Xstrata and Norilsk Nickel trade in Europe, so for no other reason, they are not on the Cara 100. The problem, you see, is that it's just too hard for the Little People to get access to info on these companies as it is for the others I have listed.

Of course, that's not any issue for institutional trading accounts.

I'd like readers to observe the trend rom 2004 to a peak in earnings for this industry not expected to come into 2007. Moreover, the China economy is expected to boom right through the 2008 Olympic Games of Beijing. I endorese the comments made by MS re the base metal market, and the phenomenal earnings growth through to early-mid 2008.

The Cara 100 companies that are Base Metals and Steelmakers are:

Aluminum Corp of China [GICS 15, Cara 100]
(ACH: Yahoo Finance file)
(ACH: StockChart chart)
(ACH: Investertech chart)
(ACH: ADVFN Financial Data)
(ACH: ADVFN Financial Data)

BHP Billiton Ltd [GICS 15, Cara 100]
(BHP: Yahoo Finance file)
(BHP: StockChart chart)
(BHP: Investertech chart)
(BHP: ADVFN Financial Data)
(BHP: ADVFN Financial Data)

Gerdau S.A. [GICS 15, Cara 100]
(GGB: Yahoo Finance file)
(GGB: StockChart chart)
(GGB: Investertech chart)
(GGB: ADVFN Financial Data)
(GGB: ADVFN Financial Data)

Nucor Corp [GICS 15, Cara 100]
(NUE: Yahoo Finance file)
(NUE: StockChart chart)
(NUE: Investertech chart)
(NUE: ADVFN Financial Data)
(NUE: ADVFN Financial Data)

Teck-Cominco Ltd [GICS 15, Cara 100]
(TCK: Yahoo Finance file)
(TCK: StockChart chart)
(TCK: Investertech chart)
(TCK: ADVFN Financial Data)
(TCK: ADVFN Financial Data)

Companhia Vale Do Rio [GICS 15, Cara 100]
(RIO: Yahoo Finance file)
(RIO: StockChart chart)
(RIO: Investertech chart)
(RIO: ADVFN Financial Data)
(RIO: ADVFN Financial Data)

Xstrata and Norilsk would be at the top of this list. In particular, I like Xstrata, but long-time readers know how early I jumped on the Norilsk bandwagon. Norilsk was even a favorite of the Trader Wizard! And, NILSY was even a Cara 100 until some readers started complaining that they couldn't trade it.

Rio Tinto and Anglo American are traded on the NYSE. I like both companies.

Of the Cara 100 ones, Morgan Stanley has noted the drawback that Oil is for BHP, and how awful is the aluminum market (ACH included).

There is a lot of excellent info here. I hope you take advantage of it.