Falling Metals Prices in the First Half of 2009

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After the monumental falls in metal prices during October and the bounce back in prices last week, many buyers are asking has the market hit the trough and are we seeing the beginning of a new rally? Some metals are certainly in short supply. Both tin and lead have supply side constraints that lend support to prices. In addition, many metals are below their marginal cost of production. If it were not for the wider economic situation, buyers could not be blamed for looking at the supply fundamentals and concluding that at these prices, there is only one way for them to go. Indeed with such volatility ” copper has been trading in a $1000 range over the last week or so ” some buyers are feeling almost a state of panic that the market will move strongly higher and they will be left exposed.

On the other hand the LME last week had to correct its closing evaluation prices for nickel options because the volatility exceeded the limits the system had been set up to handle. But it wasn’t just nickel. All the metals swung widely – both options and fixed contracts – from the lows hit in the third week, prices bounced between 34% and 49%, only to fall back again at the end of last week.

So it begs the question, what on earth is going on and where are prices going? What it means is that we are in the final stages of the market panic brought on by the credit crisis and that investors are reacting on emotion with little clear insight into where the market is really going or what the medium term holds for the global economy. The bounce was just such a reaction betting on the return of the super-cycle. The fall back was the first realization that the global economy is entering a period of prolonged recession in which demand for metals will be subdued and growth will be in negative territory. The markets are beginning to wake up to the fact that emerging markets are not going to keep metal demand growing. The emerging markets have problems of their own ” most notably a housing bubble in the process of bursting in China, a collapse in emerging market stock markets creating a significant drop in consumer confidence and hence demand, and exports severely effected by the downturn in the west. The volatility we have seen over the last few weeks will continue as more bad news is countered by stories of metal shortages and reports of production closures. The probability is that prices will remain weak well into 2009 and buyers should buy in the dips to meet their short term needs. We are entering a global recession and metals prices will not see prolonged support until markets move out of recession probably around the middle of next year.

–Stuart Burns

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