The wheels may have fallen off the commodities wagon

September is off to a dismal start (for investors) with some thinking that the wheels have fallen off commodities in general, and base metals in particular, what with the firmer dollar, and mostly negative assumptions about global economic growth. Other commodities such as coking coal, certain paperstock grades, and ferrochrome, however, have held relatively firm, but still, those long oil/short dollar folks must really be wondering what’s going on and are probably more than a bit nervous these days — as they should be.

At the mid-point of the past week, London Metal Exchange (LME) base metals put in a mixed performance: Most metals gained except for aluminum and one continually hears that metals remain in “a consolidation mode” — whatever that means. The dollar, meanwhile, continues to gather strength, traded at levels not seen since January. December copper closed Wednesday at $3.312/lb, rising to $3.22 on Thursday.

In related macro news, the Organization for Economic Co-operation and Development (OECD) is forecasting “weak” economic activity over the balance of the year, while also avoiding the term “recession.” For the U.S., their latest outlook included an upward revision…they now place annual growth at 1.8% from a 1.2% rate that was published in June. Their forecast for the EuroZone, however, was cut from 1.3% from 1.7%, and for Japan from 1.7% to 1.2%. For the Group of Seven industrialized nations, its annual growth forecast for this year was 1.4%, unchanged from the projection made in June.

In other macro news this week, Tuesday’s manufacturing index of the Institute of Supply Management (ISM) was basically unchanged in August, signaling zero growth in the manufacturing sector. According to the ISM, which publishes the report, an index of 49.9 is consistent with real GDP growing at a 2.8% annual rate, well above the consensus economic forecast of about a 1% growth rate in the third quarter. We also noted that July’s construction spending fell 0.6%, slightly weaker than the consensus expected.

Domestic automakers, meanwhile, reported “dismal” sales in August, with both General Motors and Ford posting double-digit declines, forcing them to announce production cuts in the second half of the year. On a more positive note, new orders at factories jumped more than expected in July; orders rose 1.3% after an upwardly revised 2.1 % gain in June – that five months in a row that this indicator has advanced.

In the weeks ahead, we suspect that we’ll be seeing some new price forecast for the above base metals complex. For example, RBC Capital Markets now sees cash aluminum averaging $1.30/lb this year, copper was forecast to average $3.55, lead was placed at $1.05 and nickel’s average was forecast at $11 with zinc’s 2008 forecast was figured at 95¢.

Michael Wright, chairman of ELG Haniel Metals, recently observed that “If demand from the stainless steel sector does not pick up in the fourth quarter, we could see prices fall to $15,000 (per metric ton.) That would mean a further drop of 41% from nickel’s year to date average–yipes.

Speaking of which, at last week’s Nickel/Stainless Steel Roundtable, hosted by the Pittsburgh chapter of the Institute of Scrap Recycling Industries, speaker David Brooks of AMM’s Pittsburgh office spoke about stainless markets, projecting 4% growth in stainless production in 2008 and 2009 (with Asia posting 7% growth in production against only 3% growth in Europe/USA). He also forecast global stainless production to total 28.6 million mt in 2008 and 29.7 million mt in 2009. MF Global’s Edward Meir has turned a bit bearish…he recently went on record seeing “…$100 crude and the high $6,000 (per metric ton) for copper by October.”