Muted rates of metals inflation

Staff -- Purchasing, 3/3/2005

Metals producers enjoyed a strong pricing run in 2004, evidenced by the all-time high in steel prices and the seven-year highs for both spot and three-month prices for the base metals, as traded on the London Metal Exchange (LME). Looking forward into the rest of 2005, buyers are forecasting muted rates of metals price inflation.

Demand for most metals is expected to recover steadily over the next five years. But for 2005, even when strong sales are evident, the supply-demand balance will remain a cause for concern. Upshot: Prices may remain at historical highs in 2005, but they will be trading lower at the end of the year.

Most manufacturing forecasts suggest robust activity in the U.S. in the first half of the year.

However, sluggish growth is projected in Europe and slower growth than last year is projected for China. All this suggests growth in consumption well under the 7.5% pace of 2004.

And, due to the need for inventory destocking (for steel in the U.S., base metals worldwide), the pace of global metals consumption is expected to become more closely tied to its actual physical use.

"A slowdown in consumption growth would be normal at this point in a traditional business cycle," says John Mothersole at the Washington office of Global Insights.

Higher interest rates and crude oil prices also could be detrimental: "Rising interest rates and higher energy prices...will act like a tax on both businesses and consumers," says analyst Edward Meir at the London office of Man Metals.

There also are signs that the price-inflating interest by the investment community in metals is slipping.