Commodities | Mar 17 2011
– Threats to global growth weighing on metal prices
– Positive US economic data supportive
– Current Chinese monetary policy not a threat to commodities demand
By Chris Shaw
Global investors are currently dealing with the twin shocks of political uprisings among nations in the MENA region and Japan's largest ever earthquake, which combined have increased downside risks to global growth. As Barclays notes, this is currently weighing on metals prices.
In the view of Barclays, until there is greater clarity with respect to these events and the likely policy response to any related inflationary pressures, prices of growth sensitive assets such as base metals and PGMs (Platinum Group Metals) should struggle. At the same time, gold should outperform given the perception the metal offers a safe haven.
Once the safe haven buying of gold runs it course and investor confidence returns, the big question according to Barclays is will physical demand be enough to set a floor under prices. There is some confidence it will, as Barclays remains of the view underlying demand remains robust.
Citi takes the view the political uncertainty in the MENA region as well as the ongoing EU sovereign debt crisis are issues likely to linger, which raises the question of why commodity markets have been so resilient.
Part of the answer in Citi's view is ongoing positive economic data from the US, which is confirming a cyclical improvement in that economy. But higher oil prices are a threat in this regard, as continued oil price strength could lead to a reversal of rising growth expectations in developed markets.
Any increase in global growth concerns and waning risk appetite could, in Citi's view, lead to near-term weakness in base metals prices. Medium-term, Citi expects strong physical demand in emerging markets and buoyant investor demand should be enough to deliver some price upside.
Post the devastation in Japan, Barclays sees the immediate effect for base metals as the closure of refined copper and zinc production and weaker consumption. Medium-term however, demand should receive a boost from reconstruction work.
Lead demand in particular could possibly rise very quickly given likely strong demand for batteries and generators, while Barclays also expects copper demand to receive a boost from power utilities replacing damaged transformers and power lines.
Chinese metal demand indicators are not particularly clear, Barclays noting weak physical market indicators are fueling fears monetary policy tightening is weighing on metals consumption. Rather than turn too bearish, Barclays points out even if a slowdown in demand is assumed Chinese metal import requirements would remain large and should improve in the second quarter.
Given the current market uncertainty, Barclays suggests aluminium offers one of the best risk/reward equations among the base metals at present, so it remains a favoured defensive trade. While copper has underperformed in recent weeks fundamentals look set to continue to improve, so Barclays remains positive and suggests buying the metal on any price dips.
Citi has a somewhat different view, suggesting the outlook for aluminium depends whether or not the price should essentially follow global energy prices as has been the case in recent weeks. For Citi, the answer is yes if prices are close to the marginal cost of production for a large portion of the industry.
At present Citi estimates the aluminium price is significantly above the cost of production for all but a small number of producers, which offers some risk for the price of the metal in the broker's view. Additional risk comes from the potential for a moderating of demand, which dropped sharply in January after rising by around 15% in 2010.
Zinc is expected to be the underperformer of the base metals suite, Barclays noting the combination of a growing market surplus and rising stocks of the metal should continue to weigh on prices over the medium-term.
For the base metals generally, Barclays suggests leading indicators for base metals demand continue to point to sustained momentum in demand growth continuing into the second quarter of 2011. A re-acceleration of Asian activity levels is evident in recent data, confirming the region as the major driver of global demand at present.
Among the precious metals Barclays expects silver and gold should find near-term support given current market uncertainties, while platinum group metals (PGMs) will struggle more in the short-term. Longer-term however, the PGMs look set to benefit from a tightening in market conditions.
Barclays retains a positive long-term view on gold, suggesting many of the long-term investment drivers remain intact in a period of low interest rates. For silver, Barclays argues as long as investment demand, and in particular retail interest, remains strong prices should retain their gains. If this interest wanes, there is scope for a fast correction in prices.
Turning to China, Standard Bank has looked at the effect of a slowing in credit extension in China in terms of any potential impact on commodity markets. The conclusion is increased monetary conservatism in China doesn't pose a long-term threat to commodity demand.
This is because fiscal policy related to infrastructure expansion remains supportive of commodity demand generally. As well, Standard bank suggests given China's current inflation outlook future monetary policy actions should already have been discounted into commodity prices.
If the inflation outlook was to deteriorate further, Standard Bank notes a more aggressive policy approach could be warranted. This would see zinc, copper, lead and nickel as the metals likely to be worst affected.
Such a scenario currently appears unlikely according to Standard Bank, though the group does suggest credit expansion in China this year is unlikely to offer the same level of support for commodities as it did in 2010.
