Commodities | Jun 15 2009
By Chris Shaw
According to Standard Chartered metal prices have rallied over the past couple of months because of a combination of a bottoming of global growth expecations, a weaker US dollar and a subsequent improvement in investor sentiment, with Chinese imports adding extra momentum to the trend.
But there are some signs the rally has gotten ahead of itself as Fortis Bank remains cautious on the longevity of the recent run up in prices given the market is entering the typically quieter summer period and because demand remains an issue for most of the metals.
As the group notes, the Chinese economic stimulus package implies demand for base metals will be higher than required for normal levels of economic activity and this is one reason imports into China have been higher, the other being the interest of the Chinese in building stocks of the metals while prices are low.
The group suggests such buying has two possible implications – the first is if this strong buying by China can be sustained until demand in the rest of the world recovers then it sets the scene for metals boom part two, but if this doesn’t prove to be the case and the buying is simply taking advantage of low prices then it sets up the market for a sustained period of lower prices as the excess inventory must still be worked through.
The issue for the group is speculators are currently working on the basis Chinese buying will be sustained until the global economy recovers but this requires a “V” shaped economic recovery. Also, Fortis notes additional production is now coming back on stream given the price gains in recent weeks and this is adding to stockpiles, while with prices now higher there is less incentive for Chinese buying.
An example is the copper market as on the group’s numbers production coming back on stream means the market will be in surplus by more than one tonnes by the end of this year, ignoring any re-stocking that might occur. In addition, even factoring in China’s buying into the recent months total global copper demand has actually declined this year, so a period of oversupply is almost a certainty if western world demand doesn’t recover more quickly than it anticipates.
As a result, Fortis sees some sort of correction in coming weeks, a view shared by Standard Chartered given higher Chinese stocks are likely to mean less pressure to retain current levels of demand, which in turn should see some of the market’s current euphoria fade.
But as global demand improves, and Standard Chartered expects signs of this to emerge in the second half of 2009, it expects a sustained recovery in prices will occur, especially as any improvement in demand globally also implies an improvement in the market’s appetite for risk. Furthermore, the group’s view is the US dollar is set to weaken further and this would add weight to the higher metal price argument.
There are some early signs the global economy is recovering, National Australia Bank notes the US The Conference Board measure of consumer confidence has now risen to its highest level since September of last year and new and existing home sales have risen slightly in the past month.
The bank continues to see a slow global economic recovery rather than a sharp improvement however, meaning demand growth should improve only gradually in the latter stages of this year and through 2010. Such an outlook suggests metal prices are likely to gently trend higher, rather than continuing to spike as has been the case in recent weeks.
In the bank’s view the most likely to gain will be the metals with the best fundamentals and here it suggests the outlook is most favourable for copper and lead as the likes of nickel and aluminium have far higher stockpiles to be worked through.
Standard Chartered offers a similar argument, suggesting while the long-term outlook is for higher prices each commodity won’t perform the same, making differentation the key. The group favours energy exposure over base metals exposure given tighter fundamentals in the former are more conducive to higher prices than is the overhang of productive capacity for many industrial metals.
In terms of specific metals the group views the aluminium market’s fundamentals as weak given ongoing increases in London Metals Exchange(LME) stocks, as evidenced by an increase of 417,000 tonnes in the past month to now be at 41 days of consumption. On the positive side, supply cuts and higher cancelled warrant levels offer some support and given the metal has shown an ability to rally even though the market’s fundamentals remain poor, it expects prices will grind higher over the medium-term.
Shorter-term is likely to be a different story according to Fortis Bank, as with the market awash with supply the quieter summer months should see prices drift lower, though a test of its February low remains unlikely in its view. In terms of specific forecasts Standard Chartered expects aluminium prices of US$1,700 per tonne in the third quarter and US$1,550 per tonne in the fourth, while Fortis sees 3-month LME prices in the short-term as trading with the range of US$1,150-$1,550 per tonne.
With respect to copper, Fortis points out the dilemma for the metal is supply-demand fundamentals are positive longer-term but negative shorter-term, increasing the risk of a correction in coming weeks or months. Adding to the chances of this happening in the group’s view is the fact the spread between Shanghai and LME prices is narrowing as production is being brought back on line.
As a result while it doesn’t expect prices will challenge the December lows Fortis does see prices medium-term prices as under pressure given the oversupply situation and so anticipates LME 3-month prices of between US$3,900-$5,100 per tonne in the shorter-term.
Standard Chartered also sees prices as a little over-extended relative to fundamentals at present and while in coming weeks it expects prices will hold up weaker demand in the third quarter is likely to see prices trend lower in coming months. The group is forecasting 3-month prices of US$4,650 per tonne in the June quarter, US$4,750 in the September quarter and US$4,000 in the final quarter of this year.
With respect to nickel the group notes LME stocks have finally begun to fall but it remains cynical about the strength of the rally as there remains significant amounts of price sensitive supply that an be brought back onstream. As a result it sees any upside as limited and expects prices will fall in the third quarter. Standard Chartered is forecasting 3-month prices of US$14,000 per tonne in the September quarter and US$13,000 in the December quarter.
While LME stocks of lead have risen in recent months Fortis sees the fundamentals as still attractive as Chinese car buying is likely to support demand during the slower early summer period and as cutbacks by zinc producers is set to tighten the market in coming months.
Standard Chartered agrees the sentiment for the metal is now relatively bullish, especially as it remains vulnerable to any supply side shocks such as are currently occuring in Peru. The offset is expected weaker base metal prices generally in the second half of this year that will drag down the lead price as well, leading the group to forecast prices of US$1,600 per tonne in the September quarter and US$1,400 per tonne in the December quarter compared to around US$1,500 per tonne in the current quarter. Fortis expects the 3-month prices to be within a range of US$1,300-$1,700 per tonne in the shorter-term.
While there is little in the way of fundamentals to support zinc prices at present, Fortis sees the amount of production cutback and likely stronger buying for the metal on the back of China’s stimulus package as supportive enough to create a tighter market in coming months. Until this happens, it sees Chinese buying continuing any time prices drift to lower levels.
The group is forecasting 3-month prices of US$1,250-$1,650 per tonne shorter-term, while Standard Chartered is forecasting September quarter prices of US$1,550 per tonne and December quarter levels of US$1,350 per tonne as stocks pick up during the period of seasonal demand weakness in coming months.
In the tin market, Standard Chartered expects prices will continue to push higher as there has been enough good news in terms of production issues, cutbacks and the improvement generally in the base metals complex. As a result the group expects prices will continue to push higher in coming weeks, though a volatile market is most likely.
In terms of medium-term forecasts the group is anticipating prices of US$15,000 per tonne in the September quarter and US$13,500 in the December quarter.