Commodities | Sep 17 2010
By Greg Peel
Barclays Capital is quite simply surprised by the sustained global strength in demand for base metals, especially given all the economic “noise” over the last quarter – US double-dip, Chinese slowing, Europe in strife, you name it. And quite simply, the last season is typically a period in which end-use demand is low and thus inventories are refilled. But this has not been the case.
Inventories have been falling, not rising. Copper inventories have fallen over the period for the first time in six years. We are now entering a period in which, typically, demand picks up and inventories are run down. But inventories are already lower. Has there simply been a seasonal time-shift, or are we about to see a base metals supply squeeze?
Citing better than expected recent Chinese data, Barclays Capital expects the latter. Barclays has upgraded its consumption forecasts and as a consequence sees higher metal prices ahead.
The analysts see copper and tin as the most constrained on the supply side. Their copper forecast for the December quarter is US$8000/t (spot currently US$7677/t) and they see “record” prices in 2011. The previous high was US$9000/t set in early 2008.
Lead fundamentals have improved, but Barclays sees the price as having already captured the upside.
Nickel is even balanced given higher prices mean more idle smelters firing up again, but Barclays also perceives a potential burst in stainless steel demand. The risk is to the upside, the analysts suggest.
The level of production of aluminium has been reined in by Chinese authorities in an attempt to be “green”, meaning not only has the global surplus been reduced but the cost of production has increased. Typically aluminium reaches a line over which it cannot cross given higher prices encourage greater production. That line should now be at a higher level, Barclays suggests.
Fundamental developments have been least supportive for zinc, Barclays notes, albeit there is some upside potential.
Stand by for further new highs in gold, says Barclays.