Many buyers face an understandable sense of anxiety as well as pressure to buy their base metal requirements forward, particularly after so many years of rising prices and volatility. After all, several key markets are at their lowest prices since the middle of the decade. On too many occasions over recent years, buyers have seen the prices dip and have not been in a position (or otherwise failed) to take advantage of the situation before prices have rallied again to new highs. Even with the appalling news of bank failures and impending recession daily spilling across our TV screens or splashed across the newspapers buyers are so conditioned by this decade’s story of emerging market demand that they instinctively expect prices to rally again. Are we right in feeling this way and how should we be thinking about our metal buying strategies over the next 6-12 months?
First let’s address the demand side of the equation. It is our belief that the global economy has made a paradigm shift this decade. Societies that have been moribund for decades have finally woken up to the realization that they are capable of attaining a similar standard of living to the west. The change has undoubtedly been made possible by a revolution in technology and by the process of globalization including lower tariff barriers, more efficient supply chain management and so on. But it has also been fed by nearly 10 years of unbroken growth in the developed world creating a relentless rise in demand on which the emerging markets have fed. A whole generation in China, India, Brazil and so on have come into the workplace expecting to be able to own a TV, refridgerator, car and even their own house. Those expectations are not going to go away and if the emerging markets are not able to meet those expectations, political unrest will eventually follow. So we can realistically expect the emerging market governments to spend as much of their huge reserves as necessary to maintain domestic growth even if the global economy stalls. We can expect interest rates generally to fall but in itself that will not stimulate the economy against a backdrop of a global recession. So governments will pump money into infrastructure investment by accelerating programs already planned. This will take the form of road, rail, ports and technology investments like national broadband networks. By spending this money, the governments will maintain domestic economic activity even if export industries suffer due to a global downturn. So we would argue the metals super cycle is not over, but for the next 18-24 months, it will stall as western demand contracts and emerging market demand is reduced.
On the supply side, with prices dropping so dramatically, many producers are still in a state of shock but already we are hearing producers talking about cutting back or idling production. The idea there is to ‘talk up the market.’ When that doesn’t work, the next stage will be to actually do it. Production capacity reductions will vary by industry and to what extent producers still have a cushion between their cost of production and the market price. Aluminum it is at or around that point. Copper still has some way to go for most producers. When the losses mount, plants will be closed. Mines will be scaled back and new projects will be postponed. Indeed the credit crunch is already having that effect, both mining and metal smelting projects are being postponed with growing frequency.
At some stage the dust will settle. Supply and demand fundamentals will take over from blind panic and liquidation due to margin calls, but, and here’s the but; we haven’t got there yet. Further sharp falls in most metal prices are becoming less likely, we are approaching the bottom, but it will most likely be a flat wok shaped bottom and prices will stay depressed for at least the first half of 2009 while the relative positions of different economic areas become clearer and some sense of longer term demand trends can be developed. In a market like that – is there any sense in buyers covering far forward when their own demand requirements are not clear? No probably not. Better to cover forward for a portion of immediate needs and play the spot market if prices continue to trend lower. Metal stocks are rising on all exchanges, there is no shortage of material around. Demand is dropping fast, and investor appetite is non existent. That doesn’t mean to say there won’t continue to be some volatility. But a return to the bull run is some considerable way off yet. With many companies unable to forecast what their own sales are going to be in 2009, now may not be the best time to be making long term commitments to metals suppliers.