Commodities | Oct 08 2009
By Chris Shaw
Over the past six months base metal prices have recovered strongly from the weakness brought on by the global financial crisis, but in recent weeks Barclays Capital notes price momentum has stalled as economic data haven’t convinced the market the world is now in a rapid growth phase.
As the analysts point out, the typical performance in an economic recovery is for the size of the rebound in growth and metals consumption to be at least as large as the scale of the fall, which suggests a strong rebound in OECD metals demand remains likely. But evidence of such a recovery has not yet emerged, meaning demand may continue to bump along the bottom for another few months before the big recovery takes hold early in 2010.
This suggests base metal prices have already recorded the bulk of their gains this year, especially since the market is presently pricing in weaker Chinese imports for the rest of the year and only a small recovery in OECD demand. This sets the scene for gold to outperform the base metals sector through the rest of this year given the positive combination of a weaker US dollar and the re-emergence of some uncertainty with respect to the economic growth outlook.
But in contrast to the base metals, the fundamentals for gold beyond this year are less supportive and so the future direction of the gold price is likely to be largely driven by the investment community, say the analysts. Fundamentals for base metals through 2010 are much more attractive given the projected economic recovery, so on such a timeframe Barclays sees greater upside potential in this sector.
OECD demand will be a major key in this potential being delivered upon, as in the group’s view macroeconomic conditions at present are gearing up for a big increase in demand. Barclays notes past trends suggest there is a three to six month lag between the turning point in economic leading indicators and any pick-up in metals consumption, so with measures such as new orders rising since lows in December of last year the timing is right for metals demand to increase. There are three indicators to watch for confirmation of this trend in the analysts’ view, these being LME stocks, semis shipments and physical premiums. If all three were to improve it would be clear evidence demand is recovering.
Taking a medium-term view, Barclays suggests it is important not to treat all the base metals as equals, as the fundamentals suggest different outcomes across the sector. The group’s preferred exposures over the next 12 months are copper and zinc given the combination of positive demand prospects and some supply side issues such as lower ore grades for both metals, potential labour disputes in copper and possible mine closures in zinc.
For lead, tin and nickel the group sees potential for higher prices next year given a positive demand outlook from a combination of restocking among OECD nations and stronger buying from Asia, but the analysts also see a higher level of risk attached to this outlook. While there again are supply side issues in play – environmental ones for lead, strikes for nickel and crackdowns on production in Indonesia in tin- there is also a level of uncertainty associated with these factors that gives a lower level of confidence than is the case in the copper and zinc markets.
Aluminium remains the group’s least preferred in the base metal sector, reflecting the fact LME inventories are at record highs and a lot of production capacity is being restarted to take advantage of current higher prices. This excess capacity, and Barclays estimates it is as much as 11 million tonnes per year, should act as an overhang and so keep a cap on prices that could mean several years of range trading as the market’s supply overhang is worked through.
Looking beyond the next year or so, Barclays takes the view the market is significantly underestimating long-term prices as annual average prices for the likes of copper, lead and tin should end the year above current consensus forecasts. This suggests unless conditions over the next decade or so are expected to be worse than over the past year, then long-term forecasts are too low, especially given ongoing structural changes are seen as likely to continue to drive strong emerging market demand for a long time to come.
At the same time, this expected strong demand growth from emerging economies in particular will put pressure on the supply side as it will force marginal production from more challenging and more complex deposits to become increasing important, meaning higher marginal costs of production and increasing risk of production outages or project delays.
All of this adds up to higher prices in coming years, with Barclays adjusting its forecasts accordingly across the base metals suite. For aluminium the group expects prices will average US$1,626 per tonne this year, rising to US$1,900 per tonne in 2010. Its long-term price forecast for the metal is US$3,200 per tonne, while the market consensus long-term forecast is US$2,291 per tonne.
While Barclays has lowered its estimate for the December quarter copper price to US$6,250 per tonne from US$6,750 previously, the analysts continue to see solid gains from this year to next as their forecast calls for average prices to increase from US$5,050 per tonne this year to US$6,593 per tonne in 2010. Barclays has a long-term price forecast of US$6,000 per tonne, which compares to the long-term consensus forecast of US$4,233 per tonne.
For lead, Barclays expects an average price this year of US$1,698 per tonne and in 2010 of US$2,075 pe tonne, while again its long-term price forecast of US$1,700 per tonne sits well above the market consensus figure of US$1,263 per tonne.
It is a similar story in nickel as the group sees current prices as something of an ebb and when the pace of restocking picks up so too will prices. To reflect this its average price forecast increases from US$14,968 per tonne this year to US$21,500 per tonne in 2010, while its long-term forecast of US$17,500 per tonne is above the consensus estimate of US$15,653.
Tin also looks set to do better than the broader market expects as Barclays is forecasting an average price of US$13,788 per tonne this year and US$17,250 per tonne in 2010. Long-term the analysts see prices settling closer to current year levels given their forecast of US$14,500 per tonne, while the consensus estimate is for a long-term price of US$10,940 per tonne.
Zinc is also expected to post strong price gains next year, with the group forecasting an average in 2010 of US$2,100 per tonne, up from an expected average of US$1,601 per tonne this year. Again Barclays is more bullish than the rest of the market on the longer-term outlook, its forecast of US$2,000 per tonne easly beating the consensus estimate of US$1,720.
For gold Barclays sees some chance of a temporary pullback in prices as speculative interest in the market appears high at present, but beyond the short-term it suggests fears of rising inflation and a weakening US dollar are likely to support the metal in coming months. The analysts are forecasting an average price of US$942 per ounce this year, rising modestly to an average of US$970 per ounce in 2010.