Commodities | Sep 29 2010
By Chris Shaw
Base metal prices have increased by 11% on average over the past month, Barclays Capital noting much of the gains can be attributed to recent economic data showing signs of improvement in the global macroeconomic picture.
But the gains are attributable to more than just this, as Danske Bank notes metal prices have also been boosted by a weaker US dollar given market anticipation of further quantitative easing measures to be introduced by the US Federal Reserve.
As well, Barclays notes metal fundamentals have improved in recent weeks, especially on the demand side of the equation. Here, all recent indicators such as Chinese imports, new semis orders in the North American aluminium market and Japanese rolled copper shipments have all surprised to the upside of late.
US copper wire rod demand has also been stronger than expected, rising by 16.5% in year-on-year terms in July following a June quarter that was the first positive quarter since the end of 2007. This is especially impressive, comments Barclays, as the primary feed for such wire rod, the US construction sector, is in no way being viewed to be in a state of recovery at present.
Better data have, with the exception of nickel, seen LME stocks fall so far this month. With global forward looking business sentiment still in expansion territory, Barclays expects demand growth for metals will remain in positive territory through the second half of 2010.
As the market continues to reassess global economic conditions, Barclays expects this strengthening in demand side performance will continue to see metal price pressures weighted to the upside. This should especially be the case for those metals with significant supply side constraints, Barclays suggesting copper and tin are the best placed in this regard.
For Barclays, current and expected market conditions mean the risk for base metals lies to the upside in both fundamentals and price outlook in the December quarter. This doesn't mean prices will simply go higher in a straight line, as ANZ Banking Group suggests base metal prices now look vulnerable to a correction given the solid gains of recent weeks.
ANZ's head of commodity research, Mark Pervan, viewed most of the recent base metal price gains as a reflection of the weaker US dollar and stronger equity markets. But as Pervan points out, these moves could quickly reverse at any time.
A potential catalyst for such a turnaround in sentiment for base metals in particular could be upcoming economic data, though in Pervan's view any correction should be limited thanks to declining LME stockpiles.
Gold prices have a similar outlook, suggests Pervan.
From a medium-term perspective Barclays sees further upside for gold, both from the potential for US quantitative easing measures and from any moves by Asian central banks to try and re-balance their foreign reserves away from the US dollar. Danske Bank agrees coming economic data will be a key variable for metal prices and here the bank takes a somewhat more bearish view than that of Barclays. As an example, Danske now sees US economic growth as likely to slow markedly in coming months given recent disappointing data.
This means while there is limited risk of another recession, the market's fears of a double-dip recession are likely to remain for the time being. On the plus side, Danske Bank notes the data coming out of Asia are more positive, particularly in China where the economy appears to be regaining strength after softer numbers in the middle of the year.
Given a more upbeat scenario has now been priced into commodity markets in recent weeks, Danske Bank expects occasional sell-offs when data disappoint. As with ANZ, Danske's view is the potential for a weaker US dollar given scope additional quantitative easing in the US implies any correction in base metal prices should be relatively limited.
In 2011 Danske expects the base metal prices to gradually move higher as the business cycle matures and a soft landing for the global economy after the current mid-cycle slowdown is confirmed.
Looking at nickel specifically, Maquarie notes the fundamentals for the metal are not as positive as for the likes of copper and tin thanks to an expectation of strong supply growth in 2011.
As Macquarie notes, the recent return to work at both Vale's Ontario and Voisey Bay's operations after a year-long strike offers a potentially substantial boost to supply in coming months. There will also be a number of greenfield projects bringing new supply on-line in the first half of next year, as well as increased production from projects such Ravensthorpe nickel.
On Macquarie's numbers, global nickel supply could increase by as much as 190,000 tonnes in 2011 in year-on-year terms. This leads the broker to suggest nickel will swing from a projected deficit of around 85,000 tonnes this year to a surplus of between 15,000-20,000 tonnes in 2011.
While project risks mean production may not achieve anticipated levels, the outlook is clearly for nickel supply to be well up from current year levels in 2011. This means weaker fundamentals for the metal, which explains why the likes of Barclays see a more positive outlook for those metals with clearer supply side constraints.
