Current near-record metal prices are largely the result of the supply side's slower-than-expected reaction to a China-led demand surge.

While the consensus is for prices to ease back toward long-term trends as suppliers catch up with flattening demand growth, the slow pace of the process may continue to surprise as costs of materials, labor and energy restrict expansion.

"There is a growing risk that metal production will continue to disappoint, and force metals prices to even higher levels to attract new projects," Barclays Capital analyst Ingrid Sternby said in a report out last week.

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As sophisticated energy users, most major metal producers are insulated from day-to-day price fluctuations by long-term contracts and hedging, while current high metal prices soften the blow on their bottom lines.

But recent reports from producers highlight their exposure to the hydrocarbon squeeze, which has seen US natural gas prices, for example, more than double since June where they are expected to stay into next year, according to Barclays Capital.

Reporting quarterly results last week, world No2 zinc producer Zinifex said power costs at its Budel smelter in The Netherlands ran 40 percent over budget as high oil prices and emissions trading send European power costs soaring.

Also last week, Norway's Norsk Hydro reported record quarterly profits, thanks to oil price rises of 45 percent year on year and 27 percent higher gas prices, but warned energy and material costs will challenge improved profitability in its aluminum business.

Last month the world's largest aluminum producer, Alcoa, cautioned investors higher energy and feedstock costs were dampening its profit outlook.

Rising costs are also bringing the long-term viability of planned projects into question. Materials, equipment and labor are of greater concern to project execution but energy costs are also playing their part, analysts said.

The A$1.5 billion (HK$8.83 billion) Aldoga aluminum smelter project in northeastern Australia said recently it faces another six-month delay, with analysts speculating its Chinese backers have lost interest due in part to high power costs.

In the case of aluminum, power bills can account for half the cost of smelting, which is why energy-strapped China is attempting to curtail exports of primary aluminum.

At the same time, the world's largest copper-producing nation, Chile, faces serious constraints to future expansion as neighboring Argentina turns off the tap on natural gas to drive the Chilean industry's gas-fired power plants.

And in Zambia this month, authorities were forced to waive a 30 percent excise duty on imported heavy fuel oils to ease pressure on copper miners in the country.

National Australia Bank minerals and energy economist Gerard Burg sees the impact of rising energy costs, particularly in Europe and the United States, as supporting higher aluminum prices next year.

He said smelters elsewhere, such as Australia, have yet to feel the full impact of tight energy markets due to long-term contracts with large coal-fired generators but energy is likely to become more of an issue.

"It's becoming more of a concern given we've shifted in the last few months from a view that [high energy prices] were temporary to perhaps a longer-term issue," Burg said.

The situation is expected to attract significant aluminum investment into low-cost energy environments like the Middle East and geothermal-rich Iceland, he said.

The impact of higher energy costs is perhaps even harder felt among gold producers since the precious metal's price rise has been modest compared with industrial commodities and hedging has reduced many producers' exposure to the recent rally. Australia's largest independent gold miner, Newcrest Mining, said high fuel costs will slice A$16 million from its profit estimates this fiscal year.

"Gold producers, like Newcrest, have seen their construction and operating costs rising at a rate considerably faster than their revenues during the past year or so, and this has placed unexpected pressure on margins," said chairman Ian Johnson.

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