BASEMETALS
crisis. However, until the summer this was overshadowed by foodpricesandconstrainedhouseholdconsumptionstillper-
the myriad supply disruptions. A similar trend is apparent in sist. The latest data shows that the indicator plummeted to
the tin market. For aluminium, we believe there is genuinely 96.8 in June. This compares to 98.9 in January. Emerging
no shortage of supply anywhere along the production chain economies with limited exposure to the meltdown in the US
and the market is being supported by power-related issues creditmarketsareexpectedtofarebetter.
ratherthanduetoaphysicalshortageofsmeltingcapacity. Reflecting the downturn, industrial production in June
Despite all the disruptions, a supply response to the recent remainedweakintheEurozonewithoutputdecliningby0.5%
period of high prices is beginning to emerge. GFMS-MC y-o-y, owing to unfavourable interest rates and currency con-
believes that production growth will begin to accelerate. For ditions coupled with weakening demand. On an even more
example, this is already evident from the double-digit gains negative note, business and consumer sentiment within the
wehaveseeninChineserefinedoutputsofarthisyear.With EurozonedeclinedinJulyto89.5from94.8inJune.Businesses
theexceptionofthecoppermarket,thetightnessattheraw remainworriedaboutrisinginputprices,increasedborrowing
materialstagealsoappearstobeeasing. costs and weakening demand in export and domestic mar-
Despite all the disruptions, a supply
kets,whileconsumerconfidenceislowaslivingcostsescalate
and the outlook for labour markets deteriorates. We believe
response to the recent period of high thecurrentweaknesswillbecarriedoverto2009.
prices is beginning to emerge
IntheUS,theISMindexinchedslightlylowerto50inJuly,
compared to June’s 50.2, reflecting a weak factory sector.
DemandSideFactorsBecomingMoreImportant... However, manufacturers are benefiting from strong export
Demandisexertingincreasinginfluenceinsettingthedirec- demand, which is preventing production from collapsing.
tion for some base metal prices. Currently, those trading Furthermore,UShousingstartsinJunewere27%lowerthan
morethan50%belowtheirpeaks–nickel,leadandzinc–to a year earlier. Overall, with the environment remaining
some extent have been affected by weak demand, although restrictive, we believe a significant recovery in the country is
for lead and zinc this has also coincided with supply growth. notimminent.
Nickel,ontheotherhand,hasmainlybeenaffectedbyweak
demand coming from production cutbacks in the stainless ...WhileEmergingMarketsRemainUpbeat
steel sector in the mature economies, and more recently In contrast we note economic conditions within emerging
China. For nickel, the supply-side is improving while the markets particularly in China remain robust. China’s IP was
demand side is deteriorating. Downstream activity generally up 14.7% y-o-y in July, following a 16% increase in the pre-
has been most affected by the credit crunch and this is vious month. In addition, the country’s fixed asset invest-
reflectedinouranalysesofthesemissector. ment surged 27.3% over the first seven months of the year.
GFMS-MC believes investment in the country will likely con-
...AstheSemisSectorisHit tinue to grow at a breakneck pace in the coming months. In
Muchoftheweaknessisfocusedonproductiondestinedfor addition, Brazil’s industrial sector is growing at a solid rate.
the residential construction sector – aluminium extrusions, Industrialproductioninthecountryreboundedfrom3.6%in
copper tube and wire are particularly exposed. However, the May to 6.3% (seasonally adjusted) in June as domestic
downturninautosalesinthematureeconomiesandtheslow absorption has been propelling industrial activity, particular-
spread of the weakness in residential to non-residential mar- lytheproductionofcapitalgoods.
kets is also affecting aluminium flat-rolled markets, gal-
vanisedsteelandleaddemand.Theweaknessinthestainless MarketOutlook:MetalsIndexTrendsLower
... the battle between supply disruptions
The recent economic weakness is centred on two key base
metalconsumingsectors–constructionandautos–andthis
and weak demand will remain a is one reason for the extreme price weakness. The extent of
fundamental theme
the decline is reflected in GFMS-MC’s base metal index
(BMI).Ourindexgivesequalweighttothesixindividualbase
steel market partly reflects earlier over-production, as well as metalsasopposedtotheLMEindex,whichisheavilyweight-
the increasingly uncertain economic conditions. All in all, the ed towards aluminium and copper. In late August our BMI
demand environment in the northern hemisphere is not par- stood at around 265. This compares to October 2007’s high
ticularly positive. GFMS-MC believes the battle between sup- ofcloseto400and392inearlyMarch,whenthefundamen-
plydisruptionsandweakdemandwillremainafundamental talslookedrelativelypositive.Webelievetheindexcouldwell
theme of the base metals sector for the remainder of the dipfurtheraseconomicandfundamentalsentimentscontin-
year and into 2009, with the latter becoming increasingly uetoerode.
dominantastheeconomicslowdowntakeshold.
DecliningEnergySentimentCalmsAluminiumDown
DeteriorationintheMatureEconomiesLikelytobe Energy-related problems have a greater impact on alumini-
SharperThanExpected... um than any of the other base metals. This was particularly
The OECD CLI looks set to decline further in the coming evident as rising power costs sent aluminium to record highs
months in the seven major OECD economies as various fac- in mid-July. However, since then energy prices have trended
tors including reduced credit availability, high energy and lower taking the aluminium price with it. From a fundamen-
66 SEPTEMBER 2008 COMMODITIES NOW
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