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Most base metal prices could face downturns ahead on weakness in world economy

Source: Mineweb

Lesedauer: min

Power problems currently overshadow economic slowdown but price corrections likely before the end of the quarter.

LONDON  (UK) -  The interim update to the latest monthly Base Metals Markets Review from GFMS Metals Consulting, the base metals arm of the GFMS Group, notes that supply disruptions associated primarily with concerns over availability of power have been impinging heavily on the base metals markets, with constraint on production overshadowing concerns over the degree of economic slowdown in the United States.  It points out also that, "somewhat curiously", the base metals sector also seems to be ignoring economic weakness in the world's third largest consumer of base metals, which is Japan.

The study comments that, while the US and Japan are the weakest economies in the OECD, with the fastest deceleration in Leading Economic Indicators, there is now evidence also that Europe is starting to slow.  Industrial production contracted sharply in the Euro-zone in December and the outlook for 2008 is weak, with higher interest rates, inter alia, likely to contain industrial production in the euro-zone this year.  This is partly a function of foreign competition and tight credit conditions, which are having a knock-on effect on capacity utilisation rates.

Japanese consumer confidence continues to deteriorate, with the index in January registering the lowest level since June 2003 and household budgets under pressure as a result of higher food and petrol prices.  These are undermining confidence in future growth levels and the housing construction sector is worsening - although this is less a function of underlying economic parameters than as a result of construction regulations that ere imposed last year.

US confidence has also been sliding since last September, with sentiment at a level "consistent with an economy in recession" - although the Purchasing Managers' Index and University of Michigan consumer confidence index have both improved.

On balance, however, despite these glimmers of light in the US, the preponderance of indicators considered by the study have bearish implications for the metals markets.

Set against this mixed background of demand, but with power problems affecting production levels, base metals prices have been on the rise.  In mid-February, the price changes since the start of the year have been as follows:

 
 Start of year
 
Aluminium
 +19%
 
Copper
 +21%
 
Lead
 +21%
 
Nickel
 +5%
 
Zinc
 -1%
 

Taken metal by metal, the group notes that supply-side issues have been to the forefront of the aluminium market in recent weeks, with the 517,000tpa aluminium smelter in Tajikistan cutting output by 10%, BHP-Billion cutting back on electricity consumption at its aluminium smelters in South Africa, and continuing problems in China, a situation that has not been helped by appalling local weather conditions.  These supply problems have bolstered prices despite continued weakness in the construction sector in Europe and signs of slowing demand in the automotive sector.  Canstock and aerospace are holding up better, however, while US demand is some way off a recovery.

Copper, meanwhile, is experiencing declining stock levels and a tight Chinese market, with LME inventories at four month lows and likely to fall further.  The weakness in demand remains a feature, while in Europe and Japan demand for cable and wires are being supported by increase divestment in the energy sector, but that this is undermined by weakness in construction. 

Lead is looking comparatively bullish, with most of the short-term supportive factors (including a lack of raw materials and reduced exports from China) remaining in place and prices are therefore expected to rebound to the upside. 

Nickel has been showing broad stability in price and the Group points out that the underlying stainless steel market is showing incipient signs of life, with buyers being forced backing to the market.  Much of the improvement to date has been in Europe, which suffered hefty production cuts in 2007.  Asia is lagging, however because of high inventory levels, and underlying demand is weak in the US.  Looking at the BRIC economies the group noted that the outlook for China, Russia and Brazil has also deteriorated slightly in recent weeks, but doubts that the underlying strength in growth in these countries will be curtailed unless there is a sharp downturn in the US.

Zinc prices, which have been comparatively weak when considered against the rest of the sector, have bee showing some signs of life as a result of the power problems in South Africa and China.  Production now appears to be back at more normal levels in China while the southern African problems are not believed to have had a significant impact on the market.  With Chinese output returning to more normal levels, the focus of attention may well return to the surplus in the concentrate markets and weak demand conditions in key consuming regions.

SO WHAT IS THE PROGNOSIS FOR THE SECTOR?

The group takes the view that, while the potential remains for further supply disruptions in the base metals markets, the focus of attention is likely slowly to return to the relatively weak market conditions.  Most indicators point to relatively weak demand conditions for the base metals during the remainder of this quarter and that, as such, there is the potential for a downward correction in these markets.  The exception is the recent emergence of a few signs of tentative recovery in the nickel markets, which will eventually work to the benefit of nickel.

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