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Fear of demand slowdown haunts base metals
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Saturday, 26 Nov 2011

The last three months have seen marked price declines in the base metals complex, triggered primarily by the ongoing macro pessimism in terms of unresolved European sovereign debt crisis and compounded by the emerging risk of contagion. Also, leading indicators month after month signal steadily slowing global economic growth. There are also incipient signs of concern about China, the world's most significant player in the metals market.

The table alongside showing base metals price trends in recent months clearly reveals an across the complex sharp decline over the last three months with value loss ranging between 8.5 tin and 15.2% copper and nickel.

However, it is also clear from the table that since the last week of October, lead and zinc prices have actually improved while copper has resisted any downward pressure. The question that is engaging market participants today is the direction base metals prices are headed from hereon. Will the emerging scene be reminiscent of the 2008 collapse or is there chance of a rebound?

While the current drivers of the global base metals market are known, it is important to take cognizance of the fact that unlike in 2008 currently there are both supply side issues and demand side concerns. Working inventories are far from burdensome. If anything, China may have completed its destocking cycle and would need to begin to restock.

On the demand side, developments in Europe's industrial activity require close monitoring. Metals demand is already contracting and it risks getting worse. China's exports to Europe have eased. If Europe further tightens credit for whatever reason, then it can become a constraining factor for the real economy. In North America, there are pockets of strength such as transportation as experts assert but these look fragile.

There is growth in China's industrial sector and there is evidence of restocking demand. However, there are doubts if it would sustain for an extended period. To fight inflation, China has steadily tightened its monetary policy over the last one year. Some experts suggest that currently China may be suffering the short term cyclical impact of a self-induced monetary tightening. While softness may continue over the coming months, economic activity will respond positively as policy in Beijing shifts back to being more supportive of growth, it is argued.

Simply put demand looks somewhat vulnerable but surely less vulnerable than it did in 2008. Additionally, the role of speculative capital is much less pronounced now than it was three years ago. If the world economy does face weaker growth, then it would surely weaken global demand for base metals with consequential effect on market prices.

Anticipated demand compression in Europe over the next few quarters appears to have been already priced in. So, the downside risk to prices will have to come from elsewhere.

Metals with serious downside price risk are those fundamentally in surplus. Copper and tin markets are in deficit this year and are expected to remain so in 2012. Copper prices have held on admirably in the last few weeks despite growing global growth concerns.

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