Commodities | Jan 19 2012
By Greg Peel
As we all so frustrating know, 2011 was the year of the financial headline. Market fundamentals took very much a back seat as we bungled through months of Europe fixed, Europe not fixed, Europe fixed, oh God will Europe ever be fixed. It was all ups and downs, with the December quarter bringing us to lower levels before Christmas as fears of there never being any resolution weighing on stock and commodity prices.
Will things change in 2012? It's early days but one must assume the potential for further headline-driven market activity remains for now. Europe has been looking a tad safer in 2012 to date with the exception of Greece, which remains the biggest wildcard. Whatever happens from here, there is little doubt a European recession will provide global headwinds in 2012 and that global economic performance will again be beholden to China.
Barclays Capital analysts believe base metal prices have now overshot to the downside on the general fear. If there is an improvement in global growth momentum then metals could be a big beneficiary, the analysts suggest. A number of threats seem to have subsided from the fourth quarter such that fears of a global recession have eased a little. As to whether confidence can return will depend on those aforementioned headlines.
Barclays believes the slowdown in global metals demand growth will stabilise early in 2012 which should lead to a metal price recovery beginning in the June quarter. Such a recovery will not, however, be anything like that of 2009-10. A key to demand risk in 2012 is the Chinese property market, to which copper, aluminium and zinc are all leveraged. Barclays expects 15% year on year growth in the Chinese property market this year, which implies growth for metals demand, however the pace is slower than that of 2011.
As for production, there has been a change of trend for some metals, Barclays notes. The year now looks like being a strong one for production growth and the analysts forecast supply growth of 3% for all bar tin. This represents quite a turnaround for copper from recent years.
Growing supply in the face of persistent demand headwinds does not sound like a healthy combination for metal prices, but Barclays believes very thin pipeline inventories mean current metal stocks are a lot tighter than actual inventory counts presently suggest. With only a modest demand recovery, markets could find themselves quite tight. Copper and tin are most vulnerable in this scenario given low stock to consumption ratios and forecast market supply deficits.
Another important point to consider is the significant increase in operating costs for producers over the past two years, with aluminium costs, for example, soaring 30% on primarily the rise in energy cost. Raising the cost line reduces the number of producers able to run commercial operations which thus limits supply. Hence even if the global economy does take a turn for the worse, metal price downside should still be limited, Barclays believes.
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