Some Thoughts on Metal Activity in 2012

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Commodities, Macroeconomics

Along with most business news sources, the Telegraph ran a set of predictions this week for the world in 2012.

The slant was understandably rather UK- and Eurozone-focused, but the five commentators’ content held certain repetitive points that bear summary here as they are pertinent not just for Europe, but for global markets.

Firstly, Europe, as a source of tension and negativity for global markets, is not going to go away in 2012. Politically, the 17 nations in the Eurozone cover a wide spectrum of economic health, viewpoint and attitude to the crisis that has proved a major stumbling block to achieving any kind of viable solution in 2011, and will continue to do so in 2012. As Eurozone problems continue to echo around the financial markets, European companies will hoard cash, plan for a recession and fail to invest, exacerbating the depth and length of the downturn.

The US has shown some encouraging signs of growth in 2011 and this will likely continue in 2012, but in itself will do not more than counter Europe’s contraction. Meanwhile, emerging markets — from Brazil to India to China — are slowing, and while they will continue into positive growth in 2012, it will be slower than 2011.

Japan, however, is shaping up to be the next “sovereign debt crisis” waiting to happen, with $12.8 trillion of public debt – the equivalent of Spain and Italy combined and multiplied by four! Public debt is 237 percent of GDP and tax covers less than half of public spending; don’t expect any growth out of Japan in 2012.

There is much debate about whether China will have a hard landing; even the Bank of China predicts a sluggish global economy. Domestic over-capacity and a weak property market will be a drag on growth even if the authorities loosen financial restrictions in the first half. Property prices have another 20 percent to fall in Beijing, the bank says, and sales will be 50 percent down in 2012 from 2009.

So what impact will all this have on metals prices? The relative strength of the US will keep the dollar strong and put downward pressure on metals prices – there is an inverse relationship between the dollar and metals prices, as all metals are priced in dollars, but often consumed in other currencies.

Gold has come off considerably in the last quarter and views are mixed for 2012. UBS expects gold to average $2,050 per ounce in 2012, whereas BNP Paribas thinks it will average $1,755, but rise to $2,150 in 2013. Platinum could be hit by a recession in Europe as auto catalyst demand could be down – the auto-cat market in Europe is predominantly diesel. Palladium used more in petrol auto-cats is (relatively speaking) likely to see more support.

Commodity prices could continue to weaken in 2012 — particularly oil and copper, driven as they are by Asian market demand. The Centre for Economics and Business Research forecasts a weighted average of the main benchmarks – Brent, WTI and Dubai at $86 per barrel in 2012. Other metals like aluminum and platinum that are already into the top quartile of the production cost curve could see some production cutbacks if prices fall further, offering some support; but copper, which is still above the cost of production, looks more vulnerable.

It could be a relatively good time for US companies and prospects. Slower global growth will not help US exporters, but lower commodity prices and a firmer economy is a good base to build on. The caveat is what the politicians will do in an election year and whether the in-fighting can be resolved to reach some sensible budget deficit agreements.

–Stuart Burns

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