How Low Can Metals Prices Go?

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Macroeconomics, Supply & Demand

This is Part One of a Two Part Series 

In light of recent turbulence in the financial markets what is the outlook for metals prices for the balance of 2008/9? The impact of major bank failures are in themselves mostly short lived as far as the metals markets are concerned. Although some of the firms involved such as Lehman and Merrill Lynch are major brokers and intermediaries, there are others who can pick up their business and keep day to day trades on track. The impact is more in the longer term and is the result of symptoms that caused the banks problems in the first place.

The credit crisis has caused all businesses to be starved of borrowing facilities.  Private equity and hedge fund investment has fallen to a fraction of what it was twelve months ago. Companies are finding it harder to raise borrowings for new projects and as stock markets tumble, investors are facing margin calls or requirements to raise collateral limits. Consequently easily liquidated investments are being sold such as metals positions, oil futures and other commodities.

The issue for metals buyers is where this will lead us. Can we expect metals prices to continue to plunge? According to Mineweb, palladium is currently trading 62% off its highs; platinum is down 53%; lead by 52%; nickel by 49%; wheat by 45%; US natural gas by 47%; silver by 51%; Appalachian coal futures are 41% down, and so on. We have been hearing for months about how the supply base for many metals is constrained by higher operating costs and how this will support prices and yet they have continued to fall driven by a fear of recession and a need for cash. The fear of recession is if anything greater now than 3 months ago. The Guardian newspaper is suggesting the UK and much of the Euro zone is already in recession and with inflation increasing, the central banks have little or no room for a drop in interest rates. The Wall Street Journal is proposing the US economy will be in recession during the second half of 2008 due to a drop in both consumption and net exports. The BRIC economies are still growing. But with global markets in retreat, the question is can the BRIC economies grow sufficiently to offset recessions in the larger mature economies? The answer has to be no. However influential the emerging economies were in fueling rising demand when global growth in general was increasing, on their own they are not large enough nor are they isolated from a drop in demand from the mature economies.

Watch for our follow-up piece on where metals prices will go.

–Stuart Burns

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