While bullion bull run on, base metals plunge

February 24, 2009

Commodity Online
Gold stands out as the only metal with positive prospects over the next month, with silver a possible contender too, thanks to its symbiotic relationship with gold. Base metals' prices will continue being weighed down by the absence of any relief on the demand side -- the most recent prognosis by the International Monetary Fund is that global growth this year will be just 0.5%, well within any conceivable margin of statistical error.

The huge fiscal stimulus packages in China and the US remain the focus of attention, but this is a bit like clutching at straws as any real recovery attributable to these packages will not kick in before 2010. Meanwhile, as Chinalco's wooing of Rio Tinto, and Minmetals' pounce on Oz Minerals demonstrates, the game this year is likely to be one of strategic mergers and acquisitions, with those mining companies fortunate to be cash-rich plucking some juicy morsels among those that over-extended themselves in the good times.

Gold
Gold has had a resplendent start to the year; the scale of the ETF buying in early February was impressive. Is the price beginning to consolidate at a new and relatively strong level? It's all in the hands of jittery investors -- certainly physical demand, especially for jewellery, is suffering badly from the record high prices in many local currencies.

Silver
Silver has outperformed gold, as it usually does when both are rallying. Yet investment demand has been relatively quiet so far this month, compared to its own performance in January and that of gold in the first half of February.

Platinum
Platinum has rallied strongly for reasons that are at best puzzling and at worst inexplicable other than a rush of blood to the head of speculative investors. Sure, there have been some signs of a supply response to the recent price collapse, but the industrial demand outlook remains grim right now.

Palladium
Palladium is moving higher and investors are returning in force, which is fortunate, because carmakers are everywhere struggling to survive. Maybe the BOGOF principle some of them are now applying -- buy one, get one free -- will help boost overall demand, but we doubt it. The hopes of palladium investors have been shattered time and again; if they are not to face further disappointment we need to see more evidence that the car market is, if not improving, then at least not getting worse.

Aluminium
LME warehouse stock builds are almost daily setting new record highs and are now over 3 Mt. Demand remains abysmal even though the price is today far below what many producers need simply to survive. It's not a healthy situation when the main buyer is China's State Reserves Bureau (SRB). All that does is prolong the agony in this vicious bear market.

Copper
Chinese buying of refined copper has assisted the price to rise by $500/t since the beginning of 2009 -- a quite remarkable result given the otherwise poor prospects for demand this year. The SRB may buy as much as 300,000t refined copper to add to its existing stocks; this will no doubt keep prices unusually strong (given the circumstances) over the short-term. But when the SRB decides it has bought sufficient copper's high wire act will look precarious.

Nickel
Rising exchange stocks and declining prices suggest even further production cuts by miners may be necessary to support the price. So far 230,000t of nickel has been cut, with Eramet the latest producer to reduce output targets. Downside risk is near $9,000/t.

Lead and Zinc
The seasonal high in lead replacement batteries will see the metal's price well supported through what remains of the northern hemisphere's winter. Zinc has no such support. The lead price will remain range-bound, while that of zinc may stumble lower before the substantial supply-side cuts begin to be felt.

Tin
Tin has a stronger mix of fundamentals than all other base metals. Indonesia's ability to turn off supply as and when prices weaken should see tin remain above $10,000/t, 30%-40% above historical levels.

Steel
Steel demand is currently behaving as an excellent barometer of overall global economic health. On that basis we are living in a very sickly world -- more rationalisations of production are likely, although US steel producers are no doubt taking some comfort from the US stimulus plan, with its embedded -- buy American -- emphasis.

Plastics
Output cuts in Asia have filtered through to the price, with both LME-traded and Asian plastics prices increasing. It is inevitable that more capacity will be cut in the coming months and that should support prices, even though the outlook for a recovery in the crude oil price keeps getting pushed back.

Courtesy: Fortis Metals Monthly

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