Commodities | Dec 05 2008
By Chris Shaw
With the flow of economic data remaining decidedly negative, Barclays Capital thinks investors are pricing into commodity markets a greater deterioration in conditions than was experienced during the Great Depression of the 1930s. Add in the fact that credit market conditions are currently very tight and it sends a signal things could get even worse than they are now.
Having been a long standing bull with respect to commodity prices, the group’s view has now turned decidedly negative. Downgrades to global growth expectations and metal demand forecasts along with the sharp contraction in liquidity in credit markets means physical metal surpluses are increasing. As the group points out, this doesn’t bode well for prices in coming months.
To reflect this, Barclays Capital’s forecasts call for prices to decline further in the months ahead. Aluminium is expected to decline from an average price of US$1,900 per tonne in the December quarter to US$1,650 in the March quarter. Copper is expected to fall from US$4,000 per tonne to US$2,900 per tonne over the same time period.
The other base metals are expected to follow suit, with the group predicting lead prices to fall from US$1,200 per tonne this quarter to US$1,100 next quarter. Nickel is expected to drop from US$10,800 to US$9,900 per tonne, tin from US$13,500 to US$13,000 and zinc from US$1,150 per tonne to US$1,100. Post the March quarter, prices are broadly expected to begin something of a recovery.
In terms of the outlook for each metal, in the group’s view the aluminium market is being characterised by global demand falling faster than production cuts. With production costs also coming down, it becomes obvious as to why prices have been under pressure.
While this suggests larger production cuts are needed, the group actually sees scope for cuts in China to fall short of previous expectations given lower power tariffs have lowered production costs. With the Chinese Government appearing to prefer stimulating exports to lowering output, the likelihood is for more substantial increases in inventory for the metal.
Copper looks even more at risk of further large price declines in the short-term, as in the group’s view there continues to be clear signs of a sharp fall in global demand for the metal, while both mining and refined output growth is increasing. While this increases the risk of further inventory increases, it is hoped the continuation of supply side issues will provide some support in the medium to longer-term.
Lead was particularly weak in November given poor news flow from the global auto industry and a market view the metal had the most to fall given prices were the most above long-term averages. However, the group suggests this has been overdone, as demand remains reasonable and production is declining as output at zinc mines (lead is a by-product of zinc production) continues to be cut back. As a result, the group sees some medium-term upside risk to lead prices.
Even with production cuts and the metal price being below the marginal cost of production, nickel prices have yet to find real support. This is largely due to the demand outlook for the stainless steel sector remaining so poor. As a result, the group sees the need for further production cuts before the price of the metal bottoms.
Supply side problems continue in the tin market and Barclays expects the current market deficit to remain through 2009. But prices should also remain weak given the poor demand outlook, even allowing for recently announced production cuts.
Zinc was the only base metal to enjoy a price rise in November thanks to a series of production cuts, which is being accelerated by tight credit conditions making it more difficult for producers to finance loss-making operations. More production cuts are expected by Barclays, but it points out these are necessary given weak levels of demand. Medium-term though the group remains reasonably bullish on the outlook for zinc prices.
With respect to the precious metals, Barclays suggests the recent rally in the gold price to above US$800 per ounce was triggered in part by signs of stronger physical demand. These signs are now fading and with the group expecting further US dollar strength, it suggests this may cap any upside in gold. To reflect this, the group is forecasting the average price to fall from a forecast US$870 per ounce this year to US$820 per ounce in 2009.
A more significant fall in the silver price is expected next year. The group is forecasting average prices to decline from US$14.90 per ounce this year to US$8.90 per ounce in 2009. This reflects the group’s expectation of disappointing industrial demand for the metal.
Similarly, platinum prices are expected to decline significantly next year. The group’s forecasts call for an average of US$1,020 per ounce in 2009 against US$1,572 per ounce this year. Palladium prices are also forecast to come under pressure, as the group’s forecasts call for the average price to fall from US$351 per ounce this year to US$210 per ounce next year.