Alloying and plating metals buyers should enjoy 2009, but beware of prices, supply in 2010
Alloying and plating metals prices are low but may not stay that way
By Tom Stundza -- Purchasing, 3/12/2009 2:00:00 AM
"The outlook for supply, demand and pricing of alloying and plating metals is incredibly cloudy," says analyst Edward Meir at the MF Global commodities desk in New York. "It is almost as if someone flipped a switch back in September, causing worldwide growth to stop in its tracks. Now, most of the world is in recession. Most frustrating to suppliers is that there are no hints as to how long the current downturn will last."
The keys to a pickup in these markets will center on the timing of expanded purchasing for nickel, zinc and tin in the U.S., the European Union and Japan. That will give a clue to the probable opening of big new mining and smelting projects that have been in development for some months. Meir believes that the stimulus measures from the U.S. and other governments "should eventually kick-start global growth and trade and help lift metal prices going into 2010." However, he adds that such programs will take time to implement; hence, the upside price prospects in metals won't be evident for 2009.
Ian Pearce, CEO of Xstrata Nickel, says that plant shutdowns and employee layoffs scattered across the nonferrous metals landscape "are decisive measures during challenging times caused by the continued decline of the economic environment and deteriorating commodity markets." The Toronto-based executive says the retrenchment in supply of nickel, zinc and other alloying and plating metals has become necessary "since suppliers are facing a potentially long period of depressed commodity prices." Also importantly, demand looks to be falling.
Nevertheless, almost every market researcher expects relatively strong recovery in consumption of nickel, zinc and even tin in the second half of the year because of projected infrastructure spending. No buyers and few suppliers believe demand for coating and alloying metals will increase until 2010. Reason: World stocks are high, especially for zinc, reflecting a growing market surplus.
The tin market is also seeing a decline in demand. According to Resource Capital Research, the current tin market is lacking any strong fundamental impetus; at the moment, a bleak macro-economy and its implications for weak demand dominate. Analyst Trent Allen says that producers point to such supply-side issues as high production costs, tight tonnage of tin concentrates and more stringent governmental regulations on shipments as being the triggers that will recreate a high-price environment in coming months.
Tin is used mostly in solders for joining pipes or electrical/electronic circuits, to coat steel can stock, to alloy brass and bronze and in making bearing alloys. World refined tin demand reached an all-time record level of 400,245 net tons in 2007 but it dropped 4% in 2008 to 385,800 net tons. And, so far this quarter, no purchasing recovery is in the cards either in North America or worldwide. That's why tin prices over the past three months has been almost half what they were last summer.
ITRI, the tin producers' trade group in Taiwan, reports that industrial demand from makers of solders and chemicals has slowed dramatically over the past two-plus quarters, negating their rapid growth over 2006 and 2007. Analysts see an 8-9% drop in world demand in 2009. However, suppliers contend that underlying supply/demand balance for tin remains good because of a dwindling number of high grade, easily exploitable mines around the world.
Still, tin prices have averaged less than $6/lb on the London Metal Exchange (LME) for the past five months—"trading sideways," as one analyst puts it—after averaging a little over $9 last January though September. Analysts believe that tin purchasing will slide further this year and prices will be flat-to-down for most of this year. Resource Capital Research analyst Allen in Sydney, suggests that "the current round of global economic stimulus could restore reasonable tin demand" but not until 2010.
Randy North, a trader at RBC Capital Markets in London tells the Bloomberg news service that "once infrastructure projects get under way, both in China and the U.S., it will take a lot of zinc away very quickly." But some market watchers fear stimulus projects aren't expected to get into full swing until late in 2009 or even early in 2010. In the meantime, suppliers of nickel and zinc are cutting output.
Nickel production cuts to date totaling 90 million metric tons/year have been made in Canada, the Dominican Republic, Western Australia and Indonesia by multinational suppliers Xstrata, First Nickel, Norilsk Nickel and Vale Inco. Some of the mining, smelting and refining shutdowns are temporary; some permanent. "But all have been caused by demand uncertainties embedded in the current global economic scenario," says a Vale Inco spokesman in Toronto.
Nickel prices dropped 43% in 2008 as use fell 4%. World nickel prices rallied slightly at the start of 2009 because of optimism among traders about an imminent demand surge in Asia. When the demand pickup proved false, the price rally petered out. Demand fundamentals remain weak and most analysts now expect production stainless steel and nickel-based superalloys to fall worldwide this year. And, despite recent large cutbacks in production, analysts forecast a 25,000 metric ton surplus of nickel for the year caused by another 3% slide in purchasing. This will keep prices low until supply/demand balance is reestablished sometime in 2010.
"We use a fair amount of nickel-based materials, a market that appears to have made bottom," says John Harrington, purchasing manager at Indeeco in St. Louis, which manufactures electric heating and control systems for building construction, ocean going vessels, industrial ovens and printing machines. "Nickel stockpiles are at five-year high so there is no upward price pressure."
Economists have estimated that marginal production costs for nickel is around $5.45/lb, a price point that was attained last in October 2008. "While production cuts have been plenty, the demand side of the market remains overwhelmingly bearish," says analyst Gayle Berry at Barclays Capital in London. "News from the key consuming sector, stainless steel, continues to look bleak with scarce new orders and production cuts put in place by the steel mills." That's why her nonferrous metals team has revised the world nickel purchasing outlook downward to a 4.7% drop from 2008 buys.
Global zinc use fell sharply late in 2008 and analysts see no pickup early this year, due to what analyst Berry calls "particularly weak demand in Europe and the U.S." Atop that, China's consumption "has fallen fast," she says, "as galvanized output has plummeted in response to weak domestic demand from the construction sector and a drop off in exports." The large buildups at LME warehouses in Asia "highlight weakened demand in the region," she says.
Zinc is used primarily to galvanize steel to prevent corrosion, and is used in the smelting of brass and bronze and die-cast alloys. The primary end-uses of these materials are construction and transportation, where demand declined sharply late last summer. So far this year, high global stocks and low prices remain a problem for producers, who are shuttering production facilities.
"With the construction and transportation sectors likely to remain in recession for some time, expect the biggest fall in global zinc consumption since the late 1980s and early 1990s," says analyst at Sean Sexton at Fitch Ratings in New York. That's why analysts generally expect curtailments to hold refined metal production growth to 1% in 2009; other analysts see no growth in output. In either case, almost all market researchers see a balanced market.
"Zinc has slipped in demand and price because of the decline in purchasing of galvanized sheet steel by the automotive, appliance and consumer products sectors," says Doug Platt, a buyer at Johnson Controls in Largo, Fla. Platt says the automotive interiors plant's business was down 15% last month. He also notes that his supplier's February price of galvanized steel has dropped by 32% from the last time he had bought.
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