Our Metals Predictions for 2008

In the face of a slowing US economy, a mixed position for the European economies and a still strong Asian market, it is a particularly tough call this year to judge where prices will go. Our call is the US will teeter on recession. Europe though restricted by high ECB interest rates will still enjoy some (if reduced) growth providing the Euro/US Dollar exchange rate does not strangle exports. Asia in general and China in particular are still enjoying robust growth. China may well drop from the double digit growth of the last 5 years to high single digit figures but that is still a very significant driver for the world economy and particularly the world metal markets.

So here are the 2008 predictions:

Stainless steel will drop in price due to falling raw materials costs – nickel in particular – and reduced demand in Europe and the US. The concern in the market is that the end of the Beijing Olympics building programs will add more material for Chinese exports. See more below on nickel.

Steel in general is widely predicted to rise in 2008. Price increases have already been announced for Q1. But that isn’t where we think the price will end. The US market in particular is operating now more or less in isolation as a weaker dollar cuts off global sourcing options allowing the US mills to increase prices. This may be the case in the first 3-4 months of 2008 but we don’t see it lasting. As demand softens we see the market less able to support higher price levels even with raw material costs still firm – so steady to lower for steel as the year unfolds.

We see primary Aluminum as maintaining current levels, may be even increasing if the reduced import duties fuels demand in China. Alumina prices remain high and energy costs are resuming the relentless rise we saw during 2007. In addition older plants are being closed as energy costs make them uncompetitive further tightening supply.

Copper and Zinc on the other hand will face similar levels of demand to Aluminum but due to significant levels of new capacity coming on-stream we may see prices weakening during the latter part of 2008. Even a tight concentrates processing market may not be enough to support current prices levels. Expect volatility though, Copper in particular is a favorite of the investment vehicles and subject to significant non trade speculative buying.

Nickel has both benefited and consequently suffered from its use as a major constituent in 300 series stainless steels and as a key plating component. The rapid rises we saw in early 2007 encouraged many consumers to try lower or zero content stainless steels such as 400 series which with a softer US market for stainless will probably see Nickel prices continuing to weaken in 2008.

On the backs of these commodities, oil prices have reached an all time high of US$100/barrel in New York with many believing it could go higher. In addition, expect coal and gas prices to be supported during 2008 creating pressure on energy intensive industries. The market is driven by fear of unrest in Nigeria, Pakistan, Iran, Venezuela and just about every other significant oil producing country coupled with a rising world demand fuelled particularly by China and India. This is not a state of affairs that is likely to change overnight.

Many agricultural commodities have also been rising further fueling inflationary fears.

Of equal concern to many US consumers is what will happen to the US dollar. The vicious sell off of the dollar in Q4 2007 saw all importers hit with rising costs whether they purchased in US dollars (as suppliers strived to compensate for their lower local currency returns) or local currencies as the exchange rate slid. The US dollar is at historically low levels against the Euro and the Chinese RMB. As the Fed cuts interest rates further during 2008 expect this to get worse. Our view is the dollar could slip further against the Euro and we could see 6.8 against the RMB by late 2008, down from today’s 7.3 and 7.65 a year ago.

It will be an interesting year. The balancing act will be whether Asia’s strong growth can offset a slowing US and Western European markets. Our call is they will and we should welcome the greater stability a world market based on multiple engines of growth provides.

–Stuart Burns and Lisa Reisman