Market Report: Metals Industry Overview

A lot of things have happened over the summer. I suppose the markets have been dominated as they have for some time now by the economic picture, particularly the outlook. It is probably true to say that in the last three months, the outlook has become a bit gloomier. And there are some in the extreme that are in the minority that are forecasting a return to recession in the U.S. and possibly in other parts of the world. There’s a famous saying that if the U.S. catches a cold, the world sneezes. There is an element of that, so if the U.S. does slow and goes into a double-dip recession, then the rest of the world, particularly emerging markets – China and so on—will suffer as well. As a bank, we are not forecasting a double-dip recession either in Europe or the U.S. We think that the economic data, although it is weak, is expected. No economic recovery is smooth. No economy goes up in a straight line. This is really just a normal pattern of slowdown and what anybody would expect to see.

We take a slightly still more positive outlook on growth. We believe that there will be growth and we don’t foresee a return to recession for the global economy. We still have a positive outlook, and we think that that will continue to support metal markets.

There are some metals though that are more fundamentally better placed than others. For example copper and possibly tin and lead where there is a tightness of more material particularly at the concentrate level because of a lack of investment in mines over the last couple decades or so. We think that those constraints on supply will help support those metals better than for example aluminium or nickel where there is still oversupply and there is still capacity that is being idled or shutdown during the downturn, which is overhanging the market. We can look at each of the industrial metals and we can sort of rank them in terms of supply and demand, balance, so on. At the top of that ranking would be copper and the bottom of the ranking would be metals like nickel and aluminium.

There is a mixed outlook for the various nonferrous metals, but generally, we think that the worst is behind the market. There is an argument for a lot of the metals that at the current prices, they are trading around potential floors that are dictated by the cost of production, with the cost of production being much higher in China for a lot of the metals. If prices do fall further from current levels, we will see production cutbacks taking place in China to begin with and in other parts of the world. We believe most metals are underpinned at the moment and with our still cautiously optimistic outlook on global economic growth and stronger demand over the coming months, we think that there is scope for prices to move higher gradually over the coming months.

I think we’ve got to be realistic. The outlook has become more negative. There’s a lot of doubt about the momentum of growth particularly in the U.S. There was a meeting of central bankers in late August in Jackson Hole, Wyoming, and they debated what other measures they can take to support growth if there were to be further problems down the line. Central bankers are aware that growth has slowed in the last two to three months. I think in the second quarter, things were a lot more optimistic it looked as if recovery was gaining momentum. We had a very robust reporting season for a lot of companies and were pretty optimistic. Those same companies have said that their earnings are slower and the outlook is a lot more difficult now than it had been. So I think it is right to be cautious but we are certainly not in the camp of the real pessimists. We don’t’ think that we necessarily have to go back into recession. Interest rates are very low and we think that there may be more stimulus spending from governments if there were to be further problems on the economic outlook. We know that for example Federal Reserve Chairman Ben Bernanke has said many times that they stand ready to further help and support the economy where there are problems.

It could be that the doom and gloom in the United States is more politically driven than economically driven. We do have the midterm elections and President Obama has taken a lot of flak for his handling of the economy. And at the end of the day, it is true to say that there is only one thing that really wins elections, and that is the health of the economy. A lot of it may be that, but in respect to that, it is clear that we are going through a period of somewhat weaker growth. We don’t think it will last and maybe we will bounce back again in the fourth quarter which traditionally is a strong quarter.

The outlook for next year is still reasonably positive. What I would say is that in the dark days of June and July when we had the crisis in Europe, things did look extremely gloomy. The market believes that the stress test of the European banks was reasonably successful and that is now behind the market. We can now identify who are the weaker financial institutions and banks and who are the stronger ones so help can be directed towards those weaker banks that may need to bolster their balance sheets further. There is a lot more transparency within the marketplace. Again just comparing to the dark days of June and July, I detect sentiment has improved since that time. But clearly sentiment is not everything, and you need the data to be strong. I think we are just going through a soft patch at the moment, but I don’t think it will last.

We’re in a difficult period because it is summer and therefore, there is always a seasonal impact in the markets so it is difficult to know what we are seeing and experiencing at the moment and whether that is just a normal seasonal effect or not. We will have a better idea once summer is over and once Labor Day is over in the U.S. and activity picks up. Probably in a month’s time, we’ll have a better idea of whether we are coming out of this period of soft growth or whether it is going to be more persistent.

Robin Bhar can be contacted at robin.bhar@ca-cib.com.