Analysts again are revising 2009 nonferrous price forecasts; downward even further

If you can believe it, analysts are again revisiting their 2009 commodity forecasts for base metals.

Here are but two examples showing how uncertain things still are: UBS has trimmed global growth in 2009 to 1.3% from 2.2% and now has a 2009 average for copper of $1.30/lb, aluminum at 75¢/lb; nickel at $4/lb, and zinc at 45¢//lb…all down between 35% and 50% from the previous UBS revision. Meanwhile, Barclays has 2009 London Metal Exchange (LME) cash copper at $2.13/lb, aluminum at 98¢/lb, nickel at $4.98 and zinc at 60¢/lb.

In short, all anyone really seems to know is that the revisions should be down and not up. And the driving factors analysts note for the above? Answer: A desire to reduce risk exposure, extreme contraction in liquidity, lowering of global growth expectations, and the belief that the “latest phase of the credit crisis…has…accelerated the liquidation of length and encouraged aggressive shorting,” which has exaggerated the impact of the selling and encouraged momentum traders to also build short positions. Whew!

Chile’s Codelco reported a 8.2% decline in production in the first 9 months of the year, citing strikes and falling ore grades. This has not done much to dampen the stock build up as copper stocks continue to rise, currently at 254,800 metric tons, the highest since March of 2004. Many are noting that prices for the red metal appear “directionless,” but that’s based on a week’s worth of ups and downs. Copper prices actually have fallen more than 50% since July and 36% in October alone.

In aluminum, prices have been relatively stable this week around the 90¢-92¢/lb range leading one to wonder if they are stabilizing–although stocks are still over 1.53 million metric tons. Vale noted that its Valesul smelter is at 40% of normal capacity due to (low) metal prices with analysts noting a potential 38,000 metric ton loss in 2009. Rusal also has suspended production at its Zaporozhye smelter due to power costs and metal prices with an estimated 115k/t loss in 2009.

Lead and zinc have been holding relatively steady–with lead in the mid-to-upper 60’s cents-per-pound and zinc in the mid to lower 50’s cents. While major automotive producers have a grim outlook for 2008, there is still some hope that, despite lead’s falls, it will hold on due to the fact that the bulk of SLI ((starting, lighting, ignition) battery demand is for replacement batteries.

Nickel has continued to fall below what some guess the marginal cost to be (around $5.44/lb). Wile we have not seen many production cuts in 2008, we have currently counted supply cuts around 90,000 metric tons going into 2009 in an effort to bring needed adjustments.

(Editor’s note: The author currently is speaking on scrap trends and conducting commodities research in China. See story below.)

ISRI confronts deal-breaking in U.S. scrap supply to China

In a sign of how bad things have gotten in the scrap market, the Institute of Scrap Recycling Industries, which represents U.S. scrap processors, is addressing issues of cancelled orders, defaults and post-contract discount demands–especially as they pertain to China. ISRI leaders are addressing the issues at conferences in China and meeting with Chinese leaders–in addition to having discussions with the U.S. Department of Commerce and the US Trade Representative’s Office.

“ISRI has heard reports from an astonishing number of our members of Chinese buyers failing to pay for scrap shipments, reneging on open contracts, and seeking extraordinary discounts from the contracted price for scrap materials after those materials have reached the Chinese ports,” Bob Garino, ISRI’s director of commodities, says in a speech in Shanghai.

The Steel Business Briefing online newsletter recently reported that many buyers had been abandoning their orders, as the cargo devalued significantly en route to its destination. Some are finding it more financially practical to forfeit their deposits than to take possession of what they had agreed to purchase.
“The whole industry is being tainted by the actions of those who are very short-sighted,” Garino says in his presentation. “We implore you to speak with your colleagues in the industry, to make them aware of the great necessity for viewing the current situation in the context of long term relationships. The failure to honor one’s commitments, or to deal in an unfair manner, can have horrific implications for the possibility of any future business.”