If China is the factory for the world’s manufactured goods, then base metals are the key raw materials needed for their industrial production.
Not surprisingly, last year saw the prices of a number of metals jump several times on China’s stocking up on its inventories and continued expansion in property and manufacturing activity.
This year, however, the markets for base metals could become more volatile due to some headwinds in the horizon.
The first is higher taxes around the world to help pay for the financial crisis, the spectre of long-term unemployment burden and reduced leverage and commodity exposure by financial institutions.
Already, funds have been reducing their length in commodities to capture the gains of 2009 and prepare to be more selective in 2010.
Also, there could be massive cuts in government capital-spending programmes. Governments have built up huge budget deficits associated with bank bailouts and shoring up the financial system, and cuts in spending are already being widely touted and will likely affect commodity intensive infrastructure projects.
In aluminium, the metal seems geared to the upcoming world economic recovery and some expect demand growth of 10 per cent in 2010.
Its supply-demand position is negative, as there could be a substantial surplus in 2010.
But aluminium appears to be more resilient in the face of a price correction across base metals in Q2/Q3, and it recently rose by only 65 per cent from its cycle low versus copper at 150 per cent. Rising costs and potential closures in Europe should support aluminium.
In copper, demand prospects are not the best even though copper producers may still have difficulties keeping up with demand once the cycle is in full swing.
The copper market could be in a small surplus situation in 2010, but the market appears to be pricing in too much of future supply-side constraints in view of the uncertain macro outlook, according to analysts.
Another important base metal is zinc, which moved deeper into surplus last year, and this is set to continue in 2010.
Zinc exchange inventories continue to accumulate and the market could be looking at a zinc market surplus of 500 kilotonnes in 2010.
Zinc could also be more vulnerable than most to potential liquidation of off-market Chinese stocks.
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Base metals may face more volatility
By OH BOON PING
08 March 2010
If China is the factory for the world’s manufactured goods, then base metals are the key raw materials needed for their industrial production.
Not surprisingly, last year saw the prices of a number of metals jump several times on China’s stocking up on its inventories and continued expansion in property and manufacturing activity.
This year, however, the markets for base metals could become more volatile due to some headwinds in the horizon.
The first is higher taxes around the world to help pay for the financial crisis, the spectre of long-term unemployment burden and reduced leverage and commodity exposure by financial institutions.
Already, funds have been reducing their length in commodities to capture the gains of 2009 and prepare to be more selective in 2010.
Also, there could be massive cuts in government capital-spending programmes. Governments have built up huge budget deficits associated with bank bailouts and shoring up the financial system, and cuts in spending are already being widely touted and will likely affect commodity intensive infrastructure projects.
In aluminium, the metal seems geared to the upcoming world economic recovery and some expect demand growth of 10 per cent in 2010.
Its supply-demand position is negative, as there could be a substantial surplus in 2010.
But aluminium appears to be more resilient in the face of a price correction across base metals in Q2/Q3, and it recently rose by only 65 per cent from its cycle low versus copper at 150 per cent. Rising costs and potential closures in Europe should support aluminium.
In copper, demand prospects are not the best even though copper producers may still have difficulties keeping up with demand once the cycle is in full swing.
The copper market could be in a small surplus situation in 2010, but the market appears to be pricing in too much of future supply-side constraints in view of the uncertain macro outlook, according to analysts.
Another important base metal is zinc, which moved deeper into surplus last year, and this is set to continue in 2010.
Zinc exchange inventories continue to accumulate and the market could be looking at a zinc market surplus of 500 kilotonnes in 2010.
Zinc could also be more vulnerable than most to potential liquidation of off-market Chinese stocks.
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