Bear market is expected to force metals prices even lower in 2009
By Tom Stundza -- Purchasing, 1/15/2009 2:00:00 AM
The six-year bull run in commodities definitely is over: World prices of base metals dropped by an average 30% in 2008 as end-use markets went into a second-half demand depression. Reduced production by the world auto industry, a slowdown in global industrial demand and an increase in physical stock levels have hit manufacturing metals prices in recent months. And, with full-blown demand recovery from automakers and construction companies possibly two years away, early forecasts by economists and market analysts suggest demand for nonferrous metals as a group will slide by another 45% in 2009.
In a nutshell: Commodity metals purchasing and prices will continue to slide amid grim forecasts of a prolonged global recession. "More and more data coming from industry sources is verifying the massive downturn currently under way in global commodity markets," says analyst Jim Lennon at Macquarie Bank Research in London. "The impact of the global credit crunch is nasty and the extent of the slowdown in metals demand is savage." He adds that the "good news for the supply chain" is that rapid adjustments in output due to a lack of credit availability are helping major suppliers conserve cash. This will keep them viable until the global purchasing pickup begins.
But, in the near term, "the sharp deterioration in global industrial output and in metals-intensive sectors continues to worsen the demand outlook for industrial metals in 2009," says Jeffrey Currie, the London-based head of global commodities research at Goldman Sachs Group, in a report. J.P. Morgan Securities metals strategist Michael Jansen in London also anticipates "a tepid economic recovery" starting in late 2009 and suggests that "the pain in the metals-consuming manufacturing sector could last well into 2010." He says that "weak demand factors" will dominate for many months to come.
Executives at Codelco, the world's largest copper miner, told Bloomberg last month that the 2008–2009 price collapse signals the end of a "supercycle" for copper prices. Gijsbert Groenewegen, a fund manager at Gold Arrow Capital Management in New York, tells Bloomberg that "copper is falling clearly since people don't know what to expect of the economic climate going forward." Copper prices will continue to decline as slumping growth in China, the world's biggest metals user, reduces demand, Groenewegen says.
Currie at Goldman Sachs Group says in a note to clients that "historical highs" for inventories of nonferrous metals in 2009 will keep prices depressed throughout this year. In fact, his monthly forecast puts spot London Metal Exchange (LME) copper prices in December 2009 at $1.45/lb, as compared with $1.49 in December 2008. Aluminum inventories "are set to climb to extraordinary levels," he adds, forecasting an LME aluminum price of 68¢ in December, down from the 70¢ average of last December.
Jansen at J.P. Morgan agrees that "aluminum still has considerable excess capacity to cut, especially in China." That's why he writes that "aluminum stocks are likely to continue to rise sharply for another three to six months, generating a stock overhang that will take many months to work off." As for copper, he says that "greenfield and brownfield supply in 2009 will undermine efforts to cut production to match a more sedate demand profile." Discussing other nonferrous metals, he writes to clients that "weak demand factors for the next three to six months will continue to encourage consumers and producers to carry minimal stock with an accordant sharp rise in visible inventory levels expected."
The current consensus full-year 2009 metal price forecasts are: aluminum at 75¢/lb, down from $1.17 in 2008; copper at $1.47, from $3.16; lead at 53¢, from 95¢; zinc at 50¢, from 85¢; nickel at $4.35, from $9.56, and tin at $5.63, from $8.52. Overall, the expected 2009 nonferrous prices will be 55% lower than they were in 2007.
Despite hefty aluminum production cuts recently, more are needed, according to analysts, who say high global inventories will continue to weigh on prices into next year. Total world stocks in mid-December were 3.7 million metric tons. LME stocks of 1.9 million metric tons were at their highest level since November 1994, equating to 34 days of consumption.
"We're seeing stocks rising by several tens of thousands of tons almost on a daily basis. Very high inventories bode ill for the next several months," analyst Robin Bhar at the Calyon investment bank in London tells Reuters. He believes LME warehouse stocks might peak around 2.5 to 3 million metric tons, noting that they tend to keep rising even when an underlying economy is improving.
In a recent report, Standard Chartered analysts in London expect prices to remain depressed for the foreseeable future. A modest pick-up was predicted from mid-2009, although the stock overhang would continue to dampen any rallies.
Analysts say when the global economy returns to growth, the mismatch between demand and supply will once again dominate base metals market sentiment. Morley estimates that "when growth recovers, which will take 12–18 months, prices will head back up." This is probably why the consensus forecast has world base metals prices rising by 15% in 2010.
In the meantime, though, to offset reduced market prices, large cutbacks have been announced in the production of aluminum, nickel, zinc and tin, copper and lead. "In the past, banks and company boards would bankroll loss makers for several quarters before pulling the plug," says analyst Lennon at Macquarie Bank. "Now decisions are made rapidly." Some recent examples are:
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Freeport-McMoRan Copper & Gold is cutting 25% of production at both the Morenci and Safford copper mines in Arizona, reducing mining by 50% at the Tyrone mine in New Mexico and has suspended mining and milling at the Chino mine in New Mexico. In Peru, the company has deferred expansion at the copper concentrator for its Cerro Verde operation. It also has delayed the sulfide expansion project at El Abra in Chile. The cuts will reduce copper production by 200 million lbs in 2009 and 500 million lbs in 2010.
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Anvil Mining of Montreal has suspended copper mining and concentrate production at its Dikulushi mine in the Katanga Province of the Democratic Republic of Congo, until the price of the red metal recovers. The mine produced 9,304 metric tons of copper in concentrates in the first nine months of this year and had been forecast to produce 11,000 metric tons of contained copper for the full year.
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Xstrata is cutting zinc and lead concentrate production at its McArthur River Mine in Australia by 68,000 metric tons annually. The cuts equate to 31,700 metric tons of zinc metal and 7,200 metric tons of lead metal for the firmed headquartered in Zug, Switzerland. Ore production at the site has been cut to 2 million metric tons/year from 2.5 million tonnes in response to weak demand.
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Eramet is reducing nickel and manganese divisions in response to weak demand from specialty steelmakers. Nickel production in New Caledonia will fall to 51,000 metric tons for 2008 and to 50,000 next year. Paris-based Eramet produced close to 56,000 metric tons of nickel in 2007. Its Comilog manganese mining subsidiary in Gabon, Africa, had also cut ore and sinter output.
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GEA Group has decided to shutter its zinc-producing unit Ruhr-Zink, after it was unable after an 18-month search to find a buyer with the resources to keep the business going. The Bochum, Germany-based company's plant makes 140,000 metric tons of zinc from ore concentrates.
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Boliden is reducing production of zinc metal at its Finnish and Norwegian smelters by 60,000 metric tons of zinc metal on an annual basis due to a decline in demand, the Swedish company said. In 2007, the Boliden group produced around 460,000 metric tons of zinc.
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Canadian nickel miner FNX has cut all its nickel ore production at its McCreedy West Mine in Sudbury, Ontario, and plans to slash jobs at the site, citing the dramatic fall in nickel prices. The Canadian miner suspended production at its Levack nickel mine at the end of October after the base metal's price tumbled.
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London-based Nyrstar, the world's largest zinc smelter, has suspended temporarily the production at its 270,000 metric ton/year Balen, Belgium, zinc smelter and has reduced output at its 260,000 metric ton/year Budel, Belgium, plant.
Upshot: With the supply being reduced, "the lower that prices go and the longer they stay low, the bigger the next boom will be," London-based analyst Stephen Briggs of RBS Global Banking & Markets tells Reuters. "The key for the next cycle is that projects are being deferred and cancelled, which means they may not come on stream in time for when demand is growing strongly again."
| Aluminum | Copper | Lead | Zinc | Nickel | Tin | |
| Source: London Metal Exchange; consensus forecasts | ||||||
| 2000 | 70 | 82 | 21 | 51 | 392 | 247 |
| 2001 | 69 | 75 | 22 | 43 | 294 | 205 |
| 2002 | 67 | 78 | 23 | 39 | 338 | 203 |
| 2003 | 65 | 81 | 23 | 38 | 437 | 222 |
| 2004 | 78 | 130 | 40 | 48 | 628 | 386 |
| 2005 | 85 | 167 | 44 | 64 | 666 | 335 |
| 2006 | 116 | 306 | 60 | 144 | 1064 | 389 |
| 2007 | 120 | 325 | 117 | 151 | 1738 | 651 |
| 2008 | 117 | 316 | 95 | 85 | 956 | 852 |
| 2009(F) | 75 | 147 | 53 | 50 | 435 | 563 |
| 2010(F) | 94 | 168 | 53 | 60 | 574 | 594 |
| Metal | 2009/f | 2008 |
| Source: Consensus forecast of 24 commodities analysts compiled by Purchasing. | ||
| Aluminum | 75¢/lb | $1.17 |
| Copper | $1.47 | $3.16 |
| Lead | 53¢ | 95¢ |
| Zinc | 50¢ | 85¢ |
| Nickel | $4.35 | $9.56, |
| Tin | $5.63 | $8.52. |
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