This is part two of a two part series examining key consumption trends over the next few years and how they will impact metals markets. You can read Part One here.
The balance of payments has improved markedly over the last six months partly by a drop in consumption but also by an aversion to risk. As trade finance has become harder to secure and volumes have dropped, manufacturing has reduced imports of metals and fabricated metal parts. This is unlikely to suddenly bounce back. There was growing disquiet in many quarters with price, finance and management risks of extended global supply chains. This situation became worse as prices and volumes dropped leaving companies with large inventories in their supply chains. As a general trend we expect companies to run leaner, use distributors rather than buying producer direct volumes, source more domestically and consequently pay more for their raw materials as a result.
Are the days of conspicuous consumption over? No, though we are in recession, and unemployment continues to rise for another year or more, the age of bling has died. Spending will come back but more modestly because of less willingness or ability to fund it from equity draw-downs. We are told that 95% of Americans will be better off under the Obama administrations’ tax changes, if that is the case there should be money to spend once consumers have the confidence in their personal future. But confidence also depends upon house prices. There appears a direct correlation between foreclosure rates and the drop in house prices according to studies reported in the FT. The four states with the worst foreclosure rates Nevada, Florida, Arizona and California were the only four to suffer price declines of 20%, at least half the other sates were flat in terms of price drops, suggesting that when foreclosures ease so will house price declines. New housing starts will be unlikely to pick up before there is a generally accepted floor to prices, probably later this year. Therefore, we could expect copper, aluminium and steel demand from the construction industry to pick up gradually from the end of this year onwards. Will it get back to the boom in construction we saw in the southern states earlier this decade? No the overhang there will be even greater than in the north and east. It may be 3-5 years before those markets come back, but elsewhere demand will improve in 2010 and as demand picks up supply chain re-stocking will add a multiplier to the initially weak end user demand.
The final point is a wider one. One reason we have never held that it makes sense to project past growth into the future without deeper analysis is that consumption patterns change. If you project China’s metal and energy consumption growth into the future, the country will consume three fourths of the world’s production in another 30 years. Of course that won’t happen, for the same reasons consumption per capita has dropped in the west. We become more efficient at using what we have and that will develop further in the US. New technologies and product substitution will change the way we consume materials, further slowing a return to 2007 consumption levels even as GDP and employment improve.
The take away from all this? Metals consumption will be slow to come back from the current recession, volumes will appear to improve significantly later this year and early next as the supply chains re-stock but end user demand is unlikely to bounce back quickly, it will be gradual. Metal prices could move up more aggressively in 2010-12 as emerging market demand puts pressure on certain metals where supply side cuts have been deepest or where the supply/demand balance is already close to equilibrium, like tin and copper. Those like aluminum, carbon steels and stainless steel where capacity cuts have been temporary rather than permanent or there are massive stock overhangs will remain depressed for much longer, possibly into 2012 or beyond.
–Stuart Burns & Lisa Reisman