Commodities | Jun 11 2010
By Chris Shaw
In the view of Barclays Capital, there is a clear dislocation at present between actual data flow in commodity markets and perceptions of global economic growth trajectory, which is creating significant price volatility across markets.
As far as base metals go, strong demand has not been enough to offset the move by investors to reduce risk, which has forced prices lower. In gold however, this flight to safety on the part of investors, combined with fears of sovereign debt issues and concerns over a possible slowdown in China have pushed the metal to record highs.
On its analysis Barclays suggests the data indicate enough momentum for the goal of a continued recovery in global manufacturing over the remainder of 2010 will be achieved, though at a slower pace than had previously been expected.
Economic data also suggest global economic momentum will remain positive, while a slowing of growth in China from very strong to more sustainable levels is something to be viewed as a positive.
This means much of the current volatility in commodity markets is short-term noise, argues Barclays, reflecting a somewhat schizophrenic market mentality and a combination of undefined forces.
What makes Barclays positive on the outlook is the magnitude of the price declines experienced of late, as it means prices are now eating into the cost curve of a number of metals. This is especially the case in aluminium, where a large portion of production is now loss-making. In both zinc and nickel a far smaller portion of output is currently producing at a loss.
Cutbacks to production to address this situation are most likely to occur in China according to Barclays, as production in that country is more price-reactive. As well, the group notes Chinese producers have also had to deal with cost increases in recent months.
In aluminium, Barclays notes global production has risen more than 20% in year-on-year terms thanks to Chinese output hitting a record annualised output rate of more than 17 million tonnes. But as mentioned, higher costs and weaker prices are pressuring the marginal producers to the extent that Barclays now estimates the top 10% of marginal producers are losing around US$300 per tonne at present.
If this trend is sustained cutbacks to production are likely, something that will be needed given Barclays notes there are signs growth in aluminium demand is beginning to slow. One positive is that with prices already having fallen sharply, the increases in costs being experienced should provide some cushion to prices at current levels.
In copper, Barclays suggests market fundamentals are far more supportive at present, though a weakening over the second half of this year is expected. With the market likely to swing into a surplus during that period, prices should come down. Barclays forecast is for an average price of US$6,000 per tonne in the December quarter.
Medium-term the copper story remains constructive given ongoing urbanisation and industrialisation in China and a continued OECD economic recovery, so Barclays suggests if prices were to dip below this level it would represent a good buying opportunity.
China consumes more than 40% of lead globally, so as Barclays notes concerns about a cooling of Chinese growth have impacted on prices for the metal. Lead demand remains strong but is moderating to more sustainable levels, Barclays forecasting Chinese demand will slow to around 13-15% growth this year. This compares to 22% growth in 2009.
Weakness over the past month or so is likely to be de-stocking, so Barclays expects once this process has run its course, imports will again pick up. A widening in the price spread between domestic Chinese prices to LME prices bodes well in this regard as the spread has historically been closely linked to the level of imports.
Nickel premiums remain firm and LME stocks continue to decline, but as Barclays notes this hasn't been enough to stop a slide in prices over the past month or so. One positive is the market remains in deficit, so some price stability should emerge soon in the group's view.
Fundamentals may weaken into the second half of 2010 as there is some evidence of de-stocking in the stainless steel market, but Barclays suggests these fundamentals remain supportive enough that any further dramatic declines in price are unlikely.
Tin fundamentals are also strong, leading Barclays to suggest if concerns over the European debt crisis and Chinese policy tightening ease there is justification for a rebound in prices. Spot market indicators support such a view as LME inventories are down 22% year-to-date and should fall further in the group's view.
Supply side factors are also in tin's favour, as ongoing depletion of deposits should restrict Indonesian output and there is little new mine capacity evident at present in Barclays's view.
Price declines in zinc have been the most significant of the base metals over the past month given a perception of weaker market fundamentals. But as Barclays notes, weaker prices may slow the pace of production growth.
As well, the group suggests even if activity in the private construction sector in China cools, public consumption should offset this, meaning overall Chinese consumption should not be impacted by policy changes.
Turning to the precious metals, Barclays notes gold continues to benefit from its safe-haven status as fears of possible contagion from the Greek debt crisis remain. With investor appetite for the metal likely to stay at elevated levels, prices are expected to continue to move higher.
Silver mine supply is at record highs, while scrap supply has fallen on the back of a slowdown in recycling from consumer photographic film. Barclays expects overall supply will rise 3.2% in year-on-year terms this year, while fabrication demand should grow by 5.1%.
This won't be enough to prevent the market from remaining in surplus this year, so Barclays suggests investor demand will be the key to silver prices over the balance of this year.
Having lost 10% in May, platinum prices have now stabilised at around US$1,500 per ounce, though Barclays suggests they remain vulnerable to negative data in the short-term. The price weakness has stimulated some Chinese buying interest, which supports the group's view longer-term fundamentals remain positive for the metal.
Palladium prices were even weaker in May, losing 15%, but again Barclays notes there are now signs the price is settling above US$400 per ounce. Improved auto and industrial demand remain the key to upside momentum in the group's view, along with longer-term investor demand.
Russian state stocks remain a supply side issue but Barclays notes the implementation of a higher ceiling for US Exchange Traded Products should create a more constructive fundamental base for the longer-term. Ongoing supply disruptions should also be a positive for both platinum and palladium in the view of Barclays.
Barclays expects platinum prices to trade between US$1,600-$2,000 per ounce over the next six months, while it forecasts palladium prices will trade in a range of US$475-$700 per ounce over the same period.
