LONDON (Commodity Online): The base metals have recovered from the depressed levels of early June with prices trending higher in July and hence Natixis Commodity Markets maintains a positive view for base metals.
The impact of escalating sovereign debt crisis in Europe and unctertainy over China's efforts to curb excessive credit creation which were the main concerns of the first quarter of 2010 has eased, Natixis Commodity Markets maintains.
The recovery in demand in western economies has to be viewed in the context of the exceptionally weak post Lehman environment, but nevertheless a sharper than expected rebound has been experienced in many countries. This reflects three main factors - fiscal and monetary stimuli, strong growth in developing countries and increased capital spending in mature economies by a strengthening corporate sector, which has in turn encouraged restocking. The first of these factors will progressively diminish as the second half of the year unfolds. Even without fiscal stimuli, an ultra-low interest rate environment should help to sustain the recovery in the United States.
In 2009, the only developing country that mattered was China. In 2010, the developing country growth story has broadened to the other BRICs and countries such as Indonesia and Turkey, Natixis Commodity Markets said.
The global automobile sector illustrates this situation very clearly. Despite lacklustre growth in developed countries once scrappage schemes had been terminated, global car production rose to new historic highs thanks to the exceptionally rapid growth in demand from consumers in developing countries. China is not the only expanding market. Russian, Indian and Indonesian sales in June were up 47%, 22%, and 78% respectively, year-on-year.
China experiences a temporary demand slowdown... The desire of the Chinese government to rein in some of the excesses of its recent incredible growth seems to be taking effect. Industrial production and fixed asset investment have both slowed in recent months. Specifically for the base metals, destocking (the reverse of the situation in the West) has led to slower growth in demand, certainly when compared to the period of rapid restocking during the first half of 2009.
...even as production soars Chinese production of non-ferrous metals and steel registered sharp gains during the first half of 2010. Gains were generally over 20%, with the increase for aluminium closer to 50% despite repeated efforts by the central government to curb output. The authorities are now embarking on a more assertive set of policies that are intended to promote overall energy efficiency by curbing this energy-intensive sector, with particular focus on smaller, older, inefficient and polluting producers, as well as deterring production of energy-intensive basic industrial goods destined for immediate re-export.
Limited increases to Western supply The supply position outside China is more straightforward. At one extreme we have primary aluminium, with the market having to absorb significant capacity increases from the Middle East, India and Iceland, while at the other extreme we have the structural tightness that is emerging in the copper and tin markets. There are nevertheless other supply issues which could support the market - political and economic risk (notably in the African Copperbelt) and environmental risk (such as La Oroya, and a myriad of operations in China) and strike risk along the lines of the extended dispute at Vale's nickel operations in Canada.