BASE METALS

VM predicts further short term base metals price decline, but some recovery by end-2009

The latest metals monthly report prepared by VM Group for Fortis Bank anticipates further metals price weakness in 1Q 2009 followed by at least a degree of price recovery.

Author: Rhona O'Connell
Posted: Friday , 19 Dec 2008

LONDON - 

The latest metals monthly report from Fortis/VM Group suggests that the majority of the metals markets must expect further price declines in the first quarter of next year, before a recovery that will take prices higher by year-end; although gold will be more robust.  The Group's price forecasts expect gold to be, at $850, at the same level in twelve months' time as it is now (and, for that matter, as it was twelve months ago, more or less), while looking for $12 silver, $900 platinum and $180 palladium, an increase of 13% for silver, of 6% for platinum and no change for palladium.  For the longer term the views are bearish for gold and silver, but bullish for platinum and palladium.  Recoveries are also forecast for the base metals.

On the basis that the Great Depression has been cited by some market commentators as a precedent for the current environment, although it is a minority view with economic policy generally believed to be wiser now than it was then, the review takes the opportunity to look at the performance of the metals markets during the Great Depression. It observes that almost all the metals have "already come close to or exceeded" the decline in the early 1930s, although it does note that the analysis has to look at annual figures for the earlier period, against daily figures now.  Looking at the metals on a monthly basis suggests that copper prices have more scope on the downside.  The moves have been quicker this time around, reflecting the higher speed with which markets react to external forces, accelerated by speculative money flows.

The Depression tends to be dated, in the US, from the Wall Street Crash of October 1929 through to the late 1930s and the build-up to the Second World War.  From peak to trough, which was between 1929 and 1932, the US and Canada suffered a 19% fall in GDP while that in the UK was 10%.  The US did not regain pre-1929 levels until 1940, but Europe was swifter to recover, regaining its lost ground by 1935.  Among the base metals, copper tin and zinc all bottomed out in 1932, with copper losing 68% from its 1929 peak, tin dropped by 66% from its high (1926) lead shed 65% and zinc lost 62% from their peaks, both of which had been registered in 1925.  Nickel was under producer-led price control, while aluminium, then a very small market by comparison with today, eased gradually right the way through the 1930s.

This time around the falls from the recent peaks (to 18^th December) are as follows:  Nickel (8^th May 2007) 81%; Zinc (24^th  November 2006) 76%; lead (15^th October 2007) 75%; Copper (3^rd July 2008), 67%; and aluminium (11^th  July 2008), 56%.

Silver and the PGMS are similar to the base metals, peaking in the mid-1920s before silver bottomed out in 1932 after a 60% fall; platinum and palladium bottomed out in 1933-34 after a fall of 77%.

The Review suggests that the extent of the current declines "fits oddly" with the economic slowdown experienced so far.  In the Great Depression, output actually contracted, with the US economy declining by 28.5% between 1929 and 1932 and Western Europe declining by 9%.  This time the UN is still looking for global GDP to grow, although by a sluggish 1.0%.  Car sales fell by 80% during the Depression; this time they are down so far by one-third - and the US Administration has devised a $17.4 billion rescue package, including loans to General Motors and Chrysler contingent on business models that show that the companies will be financially viable by March.

The study suggests that the quicker price adjustment experienced this time should lead to a quicker recovery also; this should be underscored by the rapidity with which governments have increased deficit spending and very loose monetary policy - although this may be storing up inflationary problems for the future.

The study also carried an interesting assessment of the state of the automobile market and its implications for metals' demand in the short-term, especially aluminium; and whether the crisis in the sector and the wider economy as a whole changes previous assumptions that car ownership will continue to spread around the globe.  The outlook for 2009 suggests continued weakness in sales volumes; if auto sales were to move in line with GDP then sales would increase perhaps by just 1.5% with a positive skew generated by Chinese demand; the balance of expectation, however, is that sales rates will be noticeably slower than this.  For the longer term, the study considers that the world may yet have another two decades before we attain a position of "peak internal combustion engine" demand and before new technologies eventually come to challenge the old order.