This is Part Two of a Two Part Series. Part One is here.
So we can probably expect metals prices to continue to weaken, at least in the short term. The turning point, when it comes (and volatility will be the order of the day in the meantime) may be into 2009. In the meantime, buyers faced with uncertain demand for their own market should look to take advantage of lower spot prices and not seek to fix long term contracts for the time being. If you are facing an uncertain demand pattern for your own business you cannot reasonably give the commitments to suppliers that go with longer term price guarantees. It is unrealistic to expect we will recognize the bottom of the trough anymore than we clearly saw the peak of the rise, so long as we can take advantage of prices whilst in the bottom quadrant to cover ourselves on the rise we will have done well as buyers. Fixed price contracts may at best last for 12 or 18 months ” may be less depending on the industry so if we have not yet reached the bottom don’t rush to start that clock ticking now. The length and depth of this recession (or recessions as different countries will experience this to a greater and lesser extent) may in part be driven by the extent to which the downturn translates into job losses. So far employment has held up well and that has supported consumption and protected financial institutions from the potential downside of mass retail debt defaults. If job losses increase significantly the downturn will be deeper and longer than currently expected.
It is not all doom and gloom though. In the longer term, a seismic shift in the global economy has taken place. Emerging economies are set on a long term path of growth and though there will be set backs along the way this will, as we have seen this decade, have the effect of lifting the global economy and creating demand for metals and finished products. At some point the savvy buyer, in a resource constrained world, will need to establish security of metal supply and try to lock in favorable prices for as far forward as possible ” we just don’t think that time is now.