Commodities | May 24 2010
By Chris Shaw
Global micro and macroeconomic environments are moving in opposite directions at present, moves Barclays Capital notes are creating additional volatility in financial markets that is expected to continue through much of this year.
In macro terms, Barclays notes pessimism among investors has spread quickly thanks to the combination of sovereign debt concerns and fears of a slowdown in the Chinese economy. The Chinese growth issue has been of more importance in base metal markets as China has been the primary driver of demand over the past year.
But these questions about the strength of Chinese demand come at a time when real demand and actual demand indicators are performing strongly, leading Barclays to suggest the impact of a potential sharp slowdown in Chinese private construction on metals consumption has been overplayed by the market.
Citi makes the same argument, pointing out indicators such as European merchant premiums, which are the prices over LME spot paid for physical delivery, are in fact rising for copper, aluminium and nickel. The merchant premium is a good indicator of market tightness in the broker's view.
Demand indicators in other developed markets have also strengthened, something that is needed as Citi notes developed economy demand accounts for 40% of total global base metal demand. Breaking this down, Citi notes Europe accounts for 20% of global demand, the US 12% and Japan 6%.
Any strengthening in the global economic outlook is also a positive for commodity prices and here Citi has lifted its expectations, now forecasting global industrial production (IP) growth of 9.3% this year, up from 8.3% previously.
Barclays had previously indicated it expected some price weakness in commodity markets would develop later this year, so it argues the latest sell-off is too much too soon given the strength of underlying fundamentals.
Given this view Barclays doesn't recommend shorting the base metals at present, especially as once markets settle down the fact some markets have suffered much worse than others indicates some relative value opportunities are likely to emerge.
In the view of Barclays, the fact there are some demand side doubts means price performance is likely to be differentiated from the supply side. This implies the strongest headwinds for aluminium and zinc and the weakest for copper and nickel.
Zinc production is growing quickly, while Citi adds in the zinc market LME stocks are again rising as the arbitrage between LME and Shanghai Futures Exchange prices has closed. So as Barclays suggests, while zinc demand is strengthening the strength of supply growth remains a risk to prices in the second half of this year.
Aluminium market fundamentals are more robust in the view of Barclays as inventories are falling and physical premiums remain high. Though China appears to be increasingly well supplied the group suggests there is enough tightness in the OCED physical market to support prices.
In contrast, Barclays notes both copper and nickel production is struggling to increase given a combination of lower head grades, labour issues and delays to new projects. In copper specifically Citi also notes market activity is turning higher, as US shipments in March were up 20% year-on-year and 12% month-on-month. In Japan the recovery is even more pronounced, while Citi notes merchant premiums for copper are also picking up in Europe.
GSJB Were is similarly positive on the outlook for copper, the metal being its preferred medium-term exposure in the sector. This reflects its view Chinese consumption will still grow this year, demand outside of China is picking up, inventories are limited and supply growth is constrained.
Indicators for nickel are also positive as Citi notes LME stocks continue to decline and scrap prices have picked up relative to LME prices. Barclays also points out there is widespread evidence of a revival in the OECD stainless steel sector, which combined with lower stocks and weak supply side dynamics suggests some price support in the group's view.
GSJB Were is a little more cautious on nickel in the medium-term however, pointing out if the Vale-Inco strike in Canada is resolved in the second half of this year it is likely to push the nickel market into surplus by year's end.
Tin as well is likely to be a beneficiary of supply constraints, something Barclays expects will contribute to the metal having the largest deficit of all the base metals in 2010. This has helped the price outperform the other base metals over the past month, Barclays suggesting any price dips represent a buying opportunity.
The outlook for lead remains less clear, as while too bearish a scenario is being priced in there remain ongoing supply risks. Overall Barclays suggests fundamentals for the metal are improving, as Chinese demand and global consumption generally remain solid.
In terms of the outlook for prices, Barclays is forecasting average cash prices per pound for 2010 of US90c for aluminium, US307c for copper, US95c for lead, US914c for nickel, US805c for tin and US94c for zinc.
In 2011 Barclays is forecasting per pound prices of US104c for aluminium, US317c for copper, US100c for lead, US1,134c for nickel, US839c for tin and US136c for zinc.
On the same per pound basis, Citi is forecasting year-end prices for aluminium of US107c in 2010 and US110c in 2011, in copper of US343c this year and US351c in 2011, in lead of US100c in both 2010 and 2011, in nickel of US1,055c this year and US967c in 2011 and in zinc of US108c and US106c respectively.
The recent volatility in markets has also impacted on precious metal prices but again the news here is not all bad, Barclays noting Chinese buying interest has picked up as prices have declined. The latest trade data out of China supports this, indicating along with gold imports of platinum group metals and silver has risen in year-on-year terms.
With long-term investor interest high, Barclays remains positive on the outlook for gold, though elevated speculative interest levels could mean a short-term correction in the group's view. Investment will also be the key to silver price moves, as while industrial demand is picking up Barclays notes growth in mine supply will again leave the market in surplus this year.
In terms of gold price expectations Barclays is forecasting and average price this year of US$1,166 per ounce and in 2011 of US$1,010 per ounce, while Citi expects yer end prices of US$1,135 per ounce and US$1,095 per ounce respectively.