Base Metal Prospects
ByShairazAhmed
SINCETHESTART of 2008, the bull market across the base Funds:WillTheyContinueInvesting?
metalssectorhasbecomemoreselectiveandindividualfun- Investment funds have played an important role in the
damentalshavebeenplayingamuchmoreimportantrolein commodities bull market, particularly in the more liquid alu-
determiningprices. minium and copper contracts. Latest figures suggest that
This theme has certainly categorised base metals into two around US$190 bn is invested in commodity indices.
groups. New highs have been seen in the aluminium, copper However, we caution about how long this interest in base
andtinmarkets(atthestartofQ3)whilepricesoflead,nickel metalswilllastasmoreevidenceemergesaboutthepossibil-
and zinc have remained more than 50% below the bull mar- ity of stagflation in the mature economies, as well as the
ket peaks. In the summer months, the deteriorating demand sharply higher inflation developing in the emerging
and economic environment affected all the metals. However economies that will eventually require a policy response.
theformergroupofmetalsarestillmuchclosertotheearlier Given the uncertainty surrounding the financial markets,
highsthanthelatter. commodities as an alternative investment should thrive in
Such volatile performance of the LME metals raises the thistypeofenvironment,withpreciousmetalsinparticulara
obviousquestionofwhethertheperformanceofthelaggards beneficiary.GFMS-MCbelieveswithstagflationfearslikelyto
– lead, nickel and zinc – will be duplicated elsewhere in the remain a feature for some time (which is ultimately bearish
sector. The bottom line is GFMS Metals Consulting (GFMS- for base metals) we are likely to see more fund selling than
MC)islookingforpricestocontinuetrendinglower.However, fundbuyingoverthenexteighteenmonths.
wedoubtwhetherthecorrectionofthealuminium,copperor
tin markets will approach the 50% plus level. Nevertheless,
... one by one, the factors that have supported
one by one, the factors that have supported the bull market the bull market are slowly being removed
areslowlybeingremoved.
Sub-PrimeCrisis:AroundforSomeTime?
IstheSoCalled‘Super-Cycle’Ending? Thesub-primecrisisisnotjustafinancialcrisis,butaneco-
Webelievefurtherdownsidepotentialispossibleifdemand nomiconewithlargeswathesoftheglobaleconomyaffect-
conditionscontinuetodeteriorate,particularlyiftheuptrend ed by the tightening of credit conditions. The crisis, which
in stocks begins to gather pace. This is not the same as say- startedmorethanayearagointheUS,hasspreadbothgeo-
ing the base metal super-cycle is over. Metals intensive graphically (particularly to Europe) and by sector with the
growth in the BRICs and the ASEAN countries will remain a automotiveindustryfaringnearlyasbadlyastheresidential
feature, while the supply side will still be characterised by housing market. We believe that the credit crunch still has
highutilisationratesandanincreasingrelianceonpolitically some way to go, and that problems within the financial sec-
and economically unstable regions to provide some of the tor will continue to adversely affect the real economy i.e.
additional capacity that will be required to meet demand those sectors that use base metals. Importantly, the emerg-
growth.Whatislikelytohappenoverthenexttwelvemonths ingeconomieswillnotbeimmunetothissituation.
is that we will find out at what level prices will settle on the
downside of the super-cycle. This is likely to be significantly SupplyDisruptions&WeakDemand
higherthaninpreviouscycles. Tight supply has been one of the fundamental drivers
behindtheearlierpricerallies.Thishas,ofcourse,takenplace
WhereistheDollarTakingBaseMetals? against a background of weak demand, which has been in
Weakness in the US dollar has been one of the key drivers placeforsometimenow.Themostobviousexampleoftight
behindtherecentbullmarket.Overthelastthreeyearsthecur- supplyversusweakdemandiscopper,whichonthedemand
rency (when measured from peak to trough) has lost 26.8% sideisparticularlyexposedtothefall-outfromthesub-prime
againsttheeuroand21.5%againsttheyen.Thefocusofthe
currencymarketshas,however,switchedtotheeconomicslow-
TABLE1: GFMS-MCBASEMETALPRICEFORECASTS(US$)
downintheEurozoneandthelikelihoodoflowerinterestrates. CurrentPrice* H22008Range 2008 2009
Asaresult,thestrengtheningofthedollarhasbecomethecat-
Aluminium 2,720 12,700–3,400 2,955 2,700
alystforbroad-basedliquidationacrossthebasemetalscom-
Copper 7,670 6,800–8,958 8,000 7,000
plex. How long it maintains its upward trajectory though
Nickel 19,555 18,000–24,000 23,775 21,000
remainsuncertain.Webelievewiththeeconomicdownturnyet
Lead 1,819 1,650–2,100 2,210 1,765
to bottom out, the dollar for the remainder of 2008, once it
Tin 20,000 18,500–24,500 20,765 18,000
completesthistemporaryphaseofstrengthening,willquieten
Zinc 1,695 1,700–2,100 2,100 1,875
down,whileanimprovingglobaleconomyin2009shouldsee
thedollarstrengthenonceagain.
Source: GFMS Metals Consulting * As of August 21, 2008
COMMODITIESNOW SEPTEMBER 2008 65
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102