| From Komfie Manalo, Opalesque Asia: Switzerland-based commodity funds house Tiberius Asset Management AG released a report entitled ‘Capital Markets Outlook 2009’ last week. The report forecasts 2009 will be a “transition year” for the industrial metal sector, and added surplus in supply and deviation in prices will not be significant.
Demand for metal
The growth in global industrial production dictates demand for industrial metals. The economic slowdown, particularly in the 4th quarter of 2008 caused demand for industrial metal to decline. After driving the LMEX Index of the London Metal Exchange (LME) to a high of 350% growth from 2002-2007, the sector expanded to just 2% in 2008.
According to the Tiberius forecast, 2009 is poised to register a negative demand growth for the sector, unless major emerging companies, such as Brazil, India and China show some economic recovery to reverse the scenario.
The global recession has also revealed significant market surpluses which caused exchange inventories of industrial metals to increase. The credit crisis also added to the drastic build-up of exchange inventories.
During boom years, many industrial companies try to hold large internal inventories hoping demand will rise. Also, investors intentionally hoard physical inventories to reduce available supplies.
But the report sees the inventory build-up for most industrial metals have already peaked. Tiberius expects inventories surpluses to still be around at least until the middle of 2009.
Supply
Prior to the economic collapse in 2008, industrial metal producers were enjoying record profits which triggered a boom in mining explorations and a surge in production levels. Explorations were particularly high for some metals, particularly nickel and zinc, except copper, because of the complexity of the mining projects involved.
To counter over-productions, many mining firms initiated drastic measures to cut production, from shutting down projects to halting new explorations in late 2008, as the current low price level for some metals made production unprofitable.
Production levels for nickel, for example, were trimmed by roughly 7% last year and by about 16% for 2009.
Market balances
There is no doubt the growth shock in 2008 caused market surpluses in the industrial metal sector to balloon in that year. However, any deviations in prices should be modest in 2009. The key factor will be how fast inventories are drawn down, according to Tiberius.
Historically, industrial metals have had higher average roll yields than other sectors. And this was shown by the positive roll yields from 2005-2008. Improved roll yields of industrial metals have an annual performance advantage of 5% to 10% over a long-term horizon because of metals’ ease of storage, imperishability, and cyclical scarcity.
Trends in currency are also seen to effect industrial metals. Tiberius says that a decline in the U.S. dollar will increase production costs.
Individual analysis of industrial metals
Aluminum
The glut in aluminum supply reached 1.5m tons in 2008 mainly in LME’s North American warehouses, due to the fact that North American carmakers are faced with sales crisis. Some automakers in the region are on the brink of insolvency. The metal also saw its value sliding by 40% in 2008 compared with the previous year.
In 2009, aluminum surplus is projected to be at 1m tons because of the weakness in the transport sector. Tiberius said 2009 does not offer a promising opportunity for aluminum over the next 12 months. However, prices could hover in the vicinity of $1,500 per ton.
Copper
Copper was the last industrial metal to be affected by the economic slump mainly because of repeated acts of nature, such as weather, earthquakes, labor strikes and project delays. However, copper inventories began to rise in the second half of 2008 and prices started to fall. The price of copper settled just below $3,000 per ton in December.
According to Tiberius, there is no reason to cut back on copper production because there was no surplus in supply. Price is seen to trade between $2,500 and $3.500 per ton this year and could rally strongly in 2010 because of below-average inventories.
Nickel
Nickel has a large current surplus owing to the decline in the global steel production. Some 90% of the demand for nickel comes from the steel sector. The metal’s price fell 80% from its previous high. Mine operators have drastically cut their output while many new mining projects presented in Tiberius’ 2008 Capital Markets Outlook have been suspended.
Tiberius sees nickel surplus to continue this year, but said the market will not fall below the October 2008 levels. The report even indicates a double-digit demand growth for 2010.
Zinc
The report suggests a massive scale-down in zinc production as producers are under sever pressure to cut costs. Famous mines, including Broken Hill or Golden Grove, will have to scale back output. Teck Cominco’s Lennard Shelf operation has even been shut down entirely ahead of schedule.
Zinc surplus this year is projected to be between 250,000 and 300,000 tons because of weak demand for galvanized steel, one of the main end-uses for zinc. And the weak demand for zinc is forecasted to stretch up to 2010. However, Tiberus says the current price of $1,200 per ton is expected to stabilize at that level and not fall below $1,000 per ton.
Lead
The lead market will probably exhibit a small surplus in 2009. However, Tiberius admits that the underlying fundamentals are difficult to ascertain. LME inventories fell from about 100,000 to 45,000 tons in the second half of 2008, which may be at least partially due to seasonal factors.
75% of the demand for lead comes from the transport sector, particularly from producers of batteries. Since sales of new vehicles have plunged in the past months, there is little opportunity for the lead market. Moreover, the development of hybrid and electric cars will not drive the demand for lead, since the batteries employed are based on nickel/metal-hydride or lithium/ion systems.
Tin
The market for tin shrunk in 2008. The metal is used mainly as a welding metal in the electronics industry, which was also hit hard by the economic slump. Tiberius sees a slight market surplus for tin this year. But prices will remain comparatively high, so manufacturers will try to produce as much as they can.
Full report: Source
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