LME week in London is always a time for reviewing market trends and boy what a market the traders have had to review this year. There is much discussion (and even more opinions) making the rounds about whether prices are too high or if they have only just got started. Part of the problem is the highly fluid situation the global market place is in at the moment. OECD recovery has been a feature this year but is now faltering in the US. Beijing is deliberately orchestrating a cooling in Chinese growth via a number of mechanisms such as bank reserve requirements and loan to value ratios, and indirectly via a clamp down on polluting and energy consuming industries. Asia and the emerging markets of India, Brazil and so on are still growing strongly in spite of such currency volatility that the Brazilians have likened it to a war. Last, just this week as we have reported, ETF Securities, the UK based market leader in Electronic Traded Products has announced their intention to launch physically backed base metal ETFs at some stage in the future.
In such a state of flux it is hardly surprising there are such diverse opinions on the future direction of prices but a review of the comments from a few well-respected analysts present at the LME Week deserve airing. In a Reuters report Robin Bhar of Credit Agricole upgraded his forecasts for metals next year following expectations on a new round of quantitative easing (QEII) and the effect that will have on the dollar (weakening) and the increased liquidity finding its way into commodities. Specifically the bank has raised copper from $7,200 to $8,725/t next year, aluminum from $2,350 to 2,450/t, lead from $2,500 to $2,544/t, tin from $20,500 to $25,000/t and nickel from $23,500 to $24,500/ton. Only zinc remains unchanged at $2,475/t. Supporting the case, Bhar points to falling exchange inventories as evidence of tightening supply markets for metals like copper and tin.
Not all analysts agree however, Edward Meir, senior commodity analyst at MF Global is concerned about aluminum saying we will see an 800,000 ton surplus this year with global stocks at 7 million tons (exchange plus trade). Explaining the continuing rise of aluminum Meir says, “Fund flows will be a positive, commodities are now nothing to do with supply and demand – they are being driven as investment asset classes (or) anti-dollar plays.” Meir’s concern is that there has been a disconnect between prices and fundamentals in the last year and a half. “Stocks have almost doubled from 2009 to date, and yet we’re also seeing a dramatic price increase,” he said, “Next year, we’ll see another 600,000 ton surplus.” In the first six months of this year, aluminum production outside of China increased 15% from a year before and production in China is only slightly down on the spring record of 1.418m tons per month. In his opinion, production has remained strong in China and the global surplus has so far been soaked up in financing deals. Although the death knell of the long-term finance deal has been sounded before, Meir raises questions about how profitable they are in today’s more volatile forward curve market and how long they can continue.
Goldman Sachs is reported in an FT article as saying the wider market has not appreciated the impact of China on global demand for metals and has too much focus on OECD demand trends. Looking specifically at copper, Joshua Crumb a metals analyst at Goldman said the share of global copper consumption from the US, Japan and EU (G3) has fallen from 61% in 1995 to just 29% today. We suspect most inside the metals industry are only too well aware of the dominance of Asia on the metals markets but Goldman’s point is growth in the G3 is almost irrelevant to market demand, it’s all about Asia now.
The one development everyone does seem to be able to agree on is that the proposed physical metal backed ETFs will be supportive for base metals next year if they pass regulatory approval and can be brought to market. Some metals like copper and tin with such tight supply markets are likely to see the biggest boost (assuming enough inventory exists to support a physically backed ETF) but even aluminum is expected to find support if a fund is launched. What the wider long-term ramifications of having such a widely accessible asset class introduced into the market dynamics for base metals remains to be seen. Expect more coverage on MetalMiner on this topic in the weeks ahead.