Soros, Volcker and Roubini Fear More Bad News to Come in 2009

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Those with a proven track record of foreseeing both boom and bust have been speaking out during the last few days on the economic situation and giving their views on how long it will last.

Speaking at a University of Columbia dinner last Friday, George Soros is reported in Reuters to have said the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis. He went on to say, “We witnessed the collapse of the financial system. It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

Paul Volcker, former Federal Reserve Chairman and now an advisor to the Obama administration said earlier that same evening that industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.

Nouriel Roubini, who was one of only a few economists to have warned back in 2006/7 of the current financial problems was interviewed by Reuters on Friday and said in his opinion the US would be in recession for the whole of 2009 and positive growth of just 1% would not return before 2010. He likened the current recession to a baseball game saying we were only in the 3rd or 4th inning. We had sub prime loans, now we are moving on to prime loans, commercial and industrial loans. Next will come credit card debt and student loans followed by the whole alphabet of credit derivatives underlying them and about which little is understood. In the meantime, unemployment will rise to 9% by the end of this year and 10% next year. Disturbingly he observed that with probable debts of $1.8 trillion and a net worth of only $1.4 trillion the US banking system was technically insolvent and temporary nationalization of some major banks was the likely solution.

So what does this mean for the metal markets? Will they continue to slide with the banking woes, will we see $300/ton HR steel, $2000/ton copper, $1000/ton aluminum? No, the metal markets are weak; there is, in varying degrees, still over capacity in some commodities and demand will remain weak for 2009 even if the above projections prove overly gloomy. The supply and demand situation will slowly reach balance while producers of both steel and non ferrous metals set the pace. We predict consolidation and rationalization among metals producers. So far, we have only seen plant closures or idling. More to come. We predicted a low point for copper of $2800/ton and for aluminum of $1200/ton. Both metals have shown a return to weakness since the peak in January and have drifted lower this month. We don’t see any reason to change our minds even in light of the above predictions. But with demand likely to remain weak for at least the next two quarters, prices will likely remain depressed for the rest of this year. In the meantime, premiums for value add and semi finished metals will continue to come under pressure and likely have a little further to come down.

–Stuart Burns

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