Base metals may not have the glitter of gold. But, like the precious metal, their value has been rising, if not quite so sharply.

Demand for copper, nickel, aluminum and zinc tends to pick up as the economy strengthens and as metal-bashing industries start to thrive.

So, after a year in which commodity markets surged, what's in store for metal prices in 2011? The question is important for several reasons.

Economists track the moves in base metal prices to see whether inflation pressures are building. Investors look at prices, along with supply and demand, to decide whether to buy or sell mining stocks.

And companies that purchase raw materials like aluminum or copper follow metal prices closely to monitor their impact on the bottom line.

Speculative buying was a big factor in the market run-up recently. The question now is whether rising prices can be sustained.

Analysts at Montreal-based Desjardins Securities argue in a report published this week that they can.

They expect average metal prices in 2011 and 2012 to be well above last year as the economy continues to strengthen.

There are three factors at work, say analysts John Redstone and John Hughes: supply is constrained, demand is robust and inventories are low.

For example, they are raising their forecast on copper prices by 20 per cent because of a lack of major projects as well as the rising cost of construction and operation.

They foresee a 50-per-cent rise in aluminum prices by 2012, a 40-per-cent gain in zinc and a 12-per-cent increase in nickel.

As higher metal prices boost the valuation of mining stocks, the analysts recommend that investors continue to overweight portfolios with mining shares.

Of course, this is a volatile game. Metal prices can swing wildly on the latest economic news. Some market experts have warned that the recent advances in base metal prices, fuelled in part by speculation, make current price levels too expensive right now.

China is a big risk factor, too. There's a lot of uncertainty over the future direction of the Chinese economy as authorities look to cool down excessive growth and inflation.

Yesterday, aluminum giant Alcoa warned that government measures to withdraw stimulation and slow down the economy will reduce demand in China for aluminum used in construction and automobiles.

Still, growth looks like it will be solid in the key BRIC countries (Brazil, Russia, India and China). Demand is likely to outstrip supply, which will reduce inventories and put upward pressure on prices.

No major new copper mines are expected to come on stream through 2012 and existing mines are aging, meaning that ore grades continue to fall.

Meanwhile, copper consumption continues to grow at an expected increase of 4.6 per cent worldwide in 2011. At that pace, world inventories are expected to decline from the normal six weeks to nearly zero by the end of next year.

It's the same story for aluminum, notes the Desjardins report. World consumption will grow by 12 per cent in 2011, while inventories drop below normal levels.

Production, especially in China may pick up in response, but the rising cost of electricity needed in aluminum smelting will be a deterring factor.

A number of zinc mines will close after this year and while some new nickel mines are expected on stream, they won't have a big enough impact to turnaround the decline in inventories.

All this suggests that metals markets may be poised for the "next leg up," according to the Desjardins report.

The interesting question here is whether exploration will pick up as prices continue to rise. It's becoming more costly to develop mineral resources but as we've seen in the oil industry, rising prices are usually a potent incentive to go out and find more supply.

Eventually, if prices rise enough, production and demand come back into balance. But it seems as if we're a long way from that kind of equilibrium now.

phadekel@videotron.ca