Metals Markets Uncertain

Two articles released on the same day starkly illustrate the uncertainty in the metals markets at the moment. Respected economists and investment managers at Reuters Investment Outlook Summit this week gathered to state that oil and metals prices looked over priced and to issue a warning that sharply higher prices could choke off the early and still fragile signs of recovery. Brian Fabbri, chief economist for BNP Paribas North America, said the investment bank’s fair value for oil was $45 to $50 per barrel based on the global economic outlook and oil inventories being at near 19 year highs. He went on to say the near 60% run up in copper prices and similar strength in other metals was purely a China play and did not reflect current or likely demand in North America, Europe or Japan anytime soon.

At the same time, a Reuters article in Mineweb quoted Goldman Sachs as predicting copper remaining at current levels for this year and $5,800/metric ton by the end of 2010. Goldman’s feeling is any short term weakness will be shallow and short lived, and that the markets have not factored in enough of the upside being generated by the emerging markets.

So who should buyers be guided by? Are base metals over priced and likely to fall back if not to early year lows then at least to a prolonged period of prices below current levels? In which case now is not a good time to be buying forward. That has been our position for much of the first quarter, we felt the rise in prices was too fast too soon and was, for most metals anyway, not sufficiently supported by fundamentals. Or is Goldman Sachs correct – will emerging markets drive demand sufficiently to keep an upward pressure on prices and hence buyers should cover early and as far forward as possible?

We feel the markets have come a long way in a short time, at least in part as a reaction to how far they had fallen. Weakness in the US dollar has helped support prices for metals like copper and this has even had an influence on other metals like aluminum which have no reason to be where they are when you look at the massive stocks still building around the world. Our expectation is we could see a weakening of prices this summer, but it may be temporary and though we do not see the world economies powering back later this year or early next the production cuts and supply disruptions for some metals like copper, tin and to some extent zinc will support the supply side such that prices will not fall back far. In spite of the gloom espoused by well respected experts like Nouriel Roubini and Brain Fabbri, if we were buyers we would look to cover at least a portion of our annual requirements during any softening of prices this summer. With the exception of aluminum, most metals are slowly getting the supply side into some semblance of order and emerging markets have proved sufficiently resilient to prevent a collapse in prices.

–Stuart Burns

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