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 Co-head: energy & metals trading, fixed income, currency and commodities at RMB
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Recession casts shadow over metals
Julie Bain
Posted: Sun, 03 Feb 2008
[miningmx.com] -- A RECESSION in the United States – and the depth of it – will play a major role in determining the fortunes of metal prices this year: in particular, those of base metals – with all eyes on the performance of copper, a widely watched bellwether for global economic growth.
Although analysts remain divided on what metals will rise and fall, and when, it’s clear that a recession in the US is pretty much a certainty, given the continued – and to an extent, as yet, not fully realised – fallout from the sub-prime mortgage mess. The US is either heading for recession or currently slipping into one.
Analysts at Goldman Sachs and Merrill Lynch stated in mid-January that rising unemployment in the US may have pushed that economy over the edge into recession.
At the time Merrill economist David Rosenberg was quoted saying: “At no time in the past 60 years has
there been a half-percentage point climb in the unemployment rate from the low point without a recession following.”
Much is being made of the fact that the US is not the economy it once was.
It’s argued that just because it runs into recession it doesn’t mean that metal prices will fall.
Analysts and commentators maintain that demand from the developing markets of China and India will continue and, consequently, will support metal prices. That may be the case, but the impact of a slowdown in the US can’t be ignored.
Dhiraj Singh, co-head: energy & metals trading, fixed income, currency and commodities at RMB, says around 30% of all refined copper produced globally is sold for use in the US housing market.
“With more people out of jobs, the ability to repay mortgages will be lower – hence the resultant nervousness in the US housing market.
That will put pressure on flagship metal copper. “If China and India don’t take up the slack,
copper could be vulnerable and its price could trade sideways to lower in the first half of the year.”
Apart from Chinese demand (particularly in second half 2008) being relied upon to support metals prices, an additional factor – the introduction of taxes by the Chinese government – will also help.
Over the past year China has imposed taxes on energy intensive industries and that may lead to a reduction in smelting capacity for some metals. In the case of copper that could mean the concentrate may take longer to be refined and result in tightness in the market.
Investor interest in metals and their role as an investment class have been cemented over the past few years. It’s unlikely that interest will dissolve in 2008, but a knock-on effect of the sub-prime issue could be that investors may move their money to safer but lower yielding investments.
Says Singh: “I think the trend will continue (ie, fund money coming to metals) but they’ll need
to see some leading indictors to attract them in the first half of this year. I can’t see them playing the market on the long side.”
A Bloomberg News survey that polled 19 analysts (taking their median forecasts) found that lead would be the best performer of the LME traded base metals next year, but only gaining 4% compared to a rise of more than 50% last year.
The survey showed (taking the median price) the average copper price for immediate delivery on the LME would be US$6 975/t this year.
However, Jeremy Gray, an analyst at Credit Suisse Group in London, says copper could rise as high as $12 000/t as supply fails to keep up with demand, combined with glitches in production as a result of possible
industrial action.
This year may not be a bad one for metal prices, says Singh. But for now the consensus seems to be that, overall, it won’t be a great one either. However, it’s not all doom and gloom. “In the final quarter of this year, if the
US gets back on track and the subprime issue is put to bed, there’s likely to be enough demand to take metal prices to new highs.”
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