Credit crunch lowers prices of base metals
By Tom Stundza -- Purchasing, 8/22/2007 3:17:00 PM
Prices of many nonferrous and precious metals have gone into a freefall since investment banks and commodity speculators began tightening their belts—along with mortgage lenders and insurers—to ride out the turmoil in the credit markets caused by U.S. sub-prime mortgage defaults. A good example of the freefall comes from monthly tracking by Purchasingdata.com of primary aluminum ingot to Midwest customers, which looks to be down 8.5% next month off its cyclical peak.
Buyers also report to Purchasdingdata.com that orders to their companies from the housing, appliance, durable-goods and information technology sectors are coming down, so they, in turn, are planning to buy less production metals.
The Street.com says that IT managers are reporting that financial services customers are holding back on orders for new communications and computer services. And a wider credit crisis could disrupt contracts unrelated to the mortgage market or cause a slowdown in tech spending that envelops all IT services and outsourcing players, says Eric Boyce, portfolio manager at Hester Capital Management in Austin, Texas. “The whole IT industry can see dislocation in revenue from this (credit crunch) if it turns out to be a prolonged event.”
Most economists believe that a collapse in the nonferrous and precious metals markets won’t occur unless the world economy weakens significantly from rising borrowing costs. If there is no global economic collapse, companies will continue to need commodity price increases in coming months to justify spending on expanding production capacity. “We do not expect future commodities demand to be reduced unless the U.S. enters a broad-based recession,” says a Bloomberg News report of a study published by analysts Edward Morse, Adam Robinson and Michael Waldron at Lehman Brothers Holdings. “Even then, considering remarkably stable developing-country demand growth, it would take some time, beyond 2008, before a U.S. recession spread to other commodity demand growth centers.”
Commodity supplies may be curbed in the short-term soon as mining and energy companies reduce investments because of the global credit crunch, and that means prices could rise long term. “Rather than end this commodities cycle, if additional capacity construction is delayed, sustained tighter credit conditions could push a cyclical downturn in commodities further into the future,'” says the New York-based Lehman Brothers analysts. Also, other analysts think the bleeding in nonferrous and precious metals prices may be slowing.
Analysts at RBC Capital Market say these metal prices have been under pressure from technical selling on the London Metals Exchange (LME) but still believe world fundamentals remain solid, with the markets in deficit and inventories at historically low levels. “Absent a recession, we expect metal prices to remain very strong,” say analysts Fraser Phillips and Adam Schatzker in a report by The Financial Post.
Also, in a note to clients, UBS Securities analyst Tony Lesiak in New York remains bullish on gold—as he believes the noble metal's ‘safe haven’ value will emerge once the panic selling ends. So forget finding any near-term bargains for gold. He points out that there has also been strong fundamental buying of gold from jewelry manufacturers when the price falls to $650/ounce. (At present, spot gold is selling just under $660. Overall, August spot gold continues to average $665, the same price as July.)
Got a story to tell on the credit crunch’s impact on your purchasing? E-mail comments to stundza@reedbusiness.com.
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