Commodity Review and Second-Half Outlook – Part Two

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Continued from “Commodity Review and Second-Half Outlook – Part One”:

Aluminum, Zinc and the LME

Although aluminum by some standards has been in the dumps lately (i.e. throughout Q2), we can encapsulate much of the light metal’s activity to the LME warehousing issue. Even though the LME has just doubled the amount of tonnage that may be removed per warehouse per day, it won’t be effective until next April.

While that might operative word, might alleviate some supply- and lead-time bottlenecking, what does it mean for the rest of 2011? Higher prices?

Perhaps not, as intimated by Harbor Intelligence at their recent Aluminum Outlook conference. Jorge Vazquez and his team look at hundreds of indicators daily, and their overall assessment is that aluminum prices may reach much higher into 2012 and beyond but will likely remain at today’s levels, perhaps lower, until then.

Source: Reuters

However, LME issues have bled into another metal market that of zinc. Reuters recently reported that, according to several firms’ analysts, zinc prices will likely rise significantly in the second half of the year despite record-high inventories. Not only that, many estimate some 60 percent of zinc stocks in LME warehouses are “tied up in financing deals.

This forces buyers to try and get around LME-warehoused metal, but in turn, they must pay higher premiums. According to the article, physical premiums are at about 8 cents per pound, whereas last year the premium hovered at 4.5 to 5.5 cents. European premiums are also reaching highs hit in 2008.

Oil, M&A and OEMs All Worth Watching

A few other points to consider looking toward H2 of 2011:

  • OEM/producer profits and outlook: In terms of the producers, we’ve been hearing some nice profits being reported for the second quarter. Using three firms as an example, Caterpillar, Nucor and SSAB, the Swedish steel producer, all reported higher net earnings; all three, however, voiced concern that higher raw material costs and potential demand slowdown may hamper their bottom lines in Q3. Producer and OEM activity could be something to watch.
  • M&A activity in mining sector surging: Speaking of those raw material costs, mining firms are driving to consolidate to make greater plays on coal, gold and iron ore. Ernst and Young reported that so far in 2011, total deal value clocks in at $96.3 billion, which is nearly equal to 2010’s total, according to Reuters. E&Y’s global mining and metals transaction advisory leader, Lee Downham, said he expects the 2011 total to reach nearly $200 billion.
  • Oil price forecast shows no sign of slowing down: Fuel costs will remain high as far as we can see, according to several analysts, as political fractiousness and rapacious emerging world demand continue their upward trends. “Oil industry analyst PIRA estimates incremental demand will outpace supply by 1.1 million barrels per day on a year-over-year basis during the third quarter of 2011, writes San Antonio-based investor analyst Frank Holmes. He also notes that the International Energy Agency (IEA) expects oil to average $98/barrel this year, and $103/barrel next year:

Source: International Energy Agency

*Check back in with MetalMiner for a look at how quarterly pricing contracts have changed the iron ore world for good.

–Taras Berezowsky


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