Commodities Outlook For 2009: The Developing World Is Still In Growth Mode, Just
By Rob Davies
minesite.com
If we learnt one thing from 2008 it was that making forecasts is a mug’s game. Even the most bearish bears did not predict the mayhem that infected the financial markets in 2008 and clobbered the base metals in the process. On the basis that what catches you out is the thing you didn’t expect there are grounds for optimism in that no one is predicting a bull market in any asset class in 2009. It seems insolvency lawyers and pawnbrokers are the only people looking forward to a good year.
Yet this prevailing and all-pervading atmosphere of gloom, largely pedalled by the press who are among the hardest hit, is not entirely in accord with all the data. It is true that the OECD is forecasting that the economies of its member nations will collectively shrink by 0.4 per cent in 2009. But this economic cycle has never really been about growth in the developed world. It is the developing world that was the major story and, although now under stress, it still is. French bank Société Générale, in its year-end commodities review lays out its view of the economic environment, and still expects these emerging economies to grow in 2009.
Slightly less bearish than the OECD about the developed world, with its forecast of a 0.3 per cent contraction, Soc Gen nevertheless expects the world economy in total to grow by 2.4 per cent. That difference of 2.7 per cent is accounted for by China and other usual suspects like India, although the bank’s forecast of a 10 per cent growth rate for China may be a little optimistic if the reports of 75 million tonnes of iron sitting on Chinese docksides are correct. But a world economy growing at a couple of percent actually isn’t that bad. More importantly for the metals business that growth, with it bias towards developing markets, will be more metal intensive than any activity in the west. Bridge builders use a lot more metal that marketing executives.
Another encouraging number from the Société Générale forecasts is low interest rates everywhere. The range for central bank rates runs from 0.28 per cent in Japan to the highest at 1.63 per cent in the Euro Zone. Ten year bond yields go from 1.48 per cent in Japan to 3.7 per cent in the UK. So finance will be cheap, if you can get it, and that ought to favour large scale, long-term infrastructure projects that will need a lot of raw materials. Finally, the bank expects oil prices to be somewhat curtailed at the relatively modest level of US$57 a barrel, a price, which in the context of last year’s run on oil will help constrain operating costs.
But while there a few rays of optimism around there is no doubt the macro environment has turned down very quickly, and that’s what’s damaging the demand side of the metals business. Indeed, things may get worse before they get better. However, on the other side of the equation was the supply side’s failure to deliver the additional new metal on time that played a large part in sustaining the boom. While some metals, like nickel, have reversed the supply-demand balance very quickly, other metals, like copper, are still suffering from tightness on the supply side. Add in the speed at which miners have cut back on production and the threat of massive oversupply does not appear to be quite such a problem. Each metal is different of course, and a quick gallop through each one, guided by forecasts from Société Générale and Royal Bank of Scotland, sets the scene for what to expect in 2009.
Kicking off with aluminium, the biggest base metal by volume, and the industry should be congratulated for taking rapid action in reducing capacity so quickly. According to the French bank 3.7 million tonnes of capacity has been taken off-line already, of which 2.5 million tonnes is in China. This country has made the largest addition to capacity in recent years, fuelled by cheap power costs. Whether that will continue is crucial to the price outlook for the metal. What is known, though, is that this massive increase in supply was needed to cope with a huge increase in demand. Société Générale quotes metals market specialists CRU as saying that Chinese demand for aluminium rose a staggering 38 per cent in 2007. Growth of nine per cent in 2008 and a forecast of three per cent in 2009 look pretty mundane by comparison. RBS expects demand to grow by seven per cent to 42.65 million tonnes this year. That perhaps explains its forecast average price for the year of US$2,325 a tonne, against that of US$1,625 from Soc Gen.
The story in copper is very different in that there have been virtually no voluntary cuts in production. That’s because the industry has been so poor at actually delivering what it is supposed to, bedevilled as it is by labour disputes, lower grades and technical problems that mean it produces around a million tonnes less than nameplate capacity. As a consequence Soc Gen estimates the oversupply in metal in 2008 was 170,000 tonnes. With its massive reliance on the construction sector it is little surprise that the French bank estimates demand will fall by 1.2 per cent in 2009 and that this will lead to the oversupply doubling to 350,000 tonnes. Some may regard those figures as optimistic, although not RBS, which forecasts a 250,000 tonne surplus. Its forecast average price for 2009 of US$5,500 looks high compared to Soc Gen’s estimate of US$3,600 a tonne, but both could be on the high side if production keeps growing.
Nickel is a tricky metal to forecast, because its end use in stainless steel is so volatile. In fact the spread between the US$13,775 a tonne forecast by RBS and the US$11,300 predicted by Soc Gen is relatively narrow. A key factor for nickel is whether stainless steel mills will reverse the changes they made to the production of ferritic steels. Having made the changes to deal with this it is easy to see why mills would stick with the changes made and, consequently, use less nickel. Add in the collapse in demand in end markets, and the forecast 2.2 per cent contraction in demand for 2009 by Soc Gen could be a rosy estimate. Miners, though, have wasted little time in reacting to this brutal price environment and have taken out 160,000 tonnes of production with a bias to higher cost ferronickel miners.
Zinc has been in a bear market longer than the other metals and has reached the stage where the current price is well below the marginal cost of production. Despite the pressure on producers the French bank is predicting a 3.3 per cent increase in demand in 2009 to generate an average price of US$1,150 a tonne. In contrast RBS predicts an average price of US$1,550 a tonne even though it has a similar demand growth forecast.
Lead ought to be the metal that comes out best from this financial crisis. A dramatic fall in new car sales will increase the average age of the car fleet and that ought to boost demand for replacement batteries. Supply will be tightened too as cars are run for longer and scrapping is delayed. As that source already provides 68 per cent of western refined consumption even a small change in scrapping activity could impact supply dramatically. Soc Gen expects demand to rise 2.9 per cent in 2009 while RBS is more bullish at 3.5 per cent. That probably explains its forecast of US$1,675 a tonne against that of US$1,075 a tonne from Soc Gen.
There is little doubt that 2009 will be a challenging year for many industries. On the basis of these predictions mining may actually be among the better sectors on a relative scale. Whether the forecasts here given will be any more accurate than the ones made a year ago is for others to judge, and for time to tell. |
