The latest quarterly commodities review from Société Générale, which covers a broad spectrum of commodities including metals, energy and the softs, is looking for a stronger performance from the base metals than from the precious over the course of 2009, although for the longer term the outlook is more mixed.In the short term, based on the prices prevailing when the publication was compiled in late March and looking forward to the forecast average of the final quarter of this year, the strongest performer is expected to be tin with a gain of more than 35%. Aluminium and lead are expected to put on 14% and 11% each, with nickel rising by 9% and copper gaining just 4% - but this latter point is partly because copper has been the out performer in the sector in the year so far. All the precious metals are expected to sustain a fourth quarter average lower than the prices prevailing in late March, with platinum and palladium staging very shallow falls, but gold is expected to be down by 20%. Silver, typically the most treacherous metal to trade, is called down by almost 26%.For the base metals this heralds a turn around from the carnage that has prevailed over recent months, in which nickel has been the hardest hit, with late March prices some 74% down on the average for 2007. The bank expects world growth to be negative over the course of 2009, with industrialised countries contracting by 3% on a purchasing power parity basis, although emerging nations are expected to grow, albeit by less than 2%. A springback is forecast for 2010, with both growth and inflation picking up sharply in Europe and North America in particular. The study goes into depth with respect to shifting economic and market forces and the outlook for different regions. It notes that in the US the recent dual shock effect (oil and Lehman) appears to be ebbing, but that a recovery will need an end to corporate restructuring, which are still some months away, along with a sharp improvement in credit availability. Chinese manufacturing is expected to gain some further traction as the year progresses as bank lending is picking up and manufacturing inventories appear already to have been brought under control. European trading conditions remain horrific, but there are some signs of stabilisation in the purchase of big-ticket items. European consumer spending is nonetheless expected to contract this year and then show a small improvement in 2010.The bottom line as far as base metal prices are concerned is that, on an annual average basis, 2009 will represent the trough of the market and average prices for 2010 will, in general, be upwards of 23% higher than they were in late March 2009. The exception is zinc, which is expected to gain just 16%.Among the individual metals the review points out that tin differs from the other base metals in two ways. Firstly it is the only metal in backwardation throughout the forward curve, reflecting extremely weak production levels from the two largest producers, i.e. China and Indonesia. Cancelled tonnages as a proportion of the total have been high throughout the past year, standing at 10% towards the end of March, by comparison with 4% for other metals in the sectors. LME inventories stand at just 12 days' global consumption despite the fact that the market is in a backwardation - although this backwardation stands at less than 40% of the premium that has been commanded when stocks have been close to critical lows. Prices have been hard hit by collapsing demand, with electronic solder a key driving force, although tin plate has been a bright spot. No significant demand recovery is expected before the fourth quarter.Aluminium prices are expected to remain under pressure into the second quarter of 2009 in order to force the withdrawal of further capacity from the market, although production cuts overall are likely to fail in the near term to keep pace with demand contraction. The market is awash with metal as inventories have rocketed during the first quarter of the 2009, with LME inventories standing at around five weeks' global consumption, the highest since 1993 and once other inventories are taken into account then we are closer to eight weeks' demand. The study suggests that it is hard to see how these inventories can be worked off without further production cuts. A modest recovery in price is expected in the second half of the year as the trend in inventory building starts to reverse.Lead prices have seemingly bucked an appalling trend in demand as almost 50% of offtake goes into batteries in the auto sector. LME inventories are low, however, especially in comparison with previous downturns - and are much lower than inventories of other base metals. China has been providing key support, underpinning robust demand for the first quarter as a whole, much of which has stemmed from the replacement battery sector, while non-automotive end-uses also remain reasonably sturdy, but demand for the year overall is expected to decline as demand eases for winter-driven battery replacements and the downturn in new car production stars to have an impact. Meanwhile production remains constrained by mine production cuts and limited scrap availability.This applies also, by definition, to the zinc sector and further production cuts are expected over the coming quarter. Despite sharp cuts that have already been implemented, inventory levels have surged since the start of the year, but the rising trend decelerated in February and then reversed in March as China has been absorbing material. Demand contracted sharply in the first quarter of the year, but may be bottoming out. Prices in late March were virtually unchanged from the start of the year and part of this can be ascribed to the activities of China's State Reserves Bureau (SRB), which appears to have underpinned the flows of metal into China. It is questionable as to how much of this has been stockpiling as opposed to dynamic demand.
A similar argument applies to copper, for which cash prices have picked up by 30% since the beginning of the year. Chinese SRB purchases, geared in part towards stock building, have combined with tighter scrap availability to contribute to a more upbeat sentiment in the copper market, despite the fact that LME stocks have risen by almost 50% and that the market has been plagued by weak overall demand. Société Générale believes that inventory-building is price sensitive and that there is therefore a question mark over how robust these purchases will be in the short term. There are few bright spots to be found for demand and redefined copper consumption is expected to contract substantially by comparison with 2008. Production is also expected to come down this year, but by a proportionately lower rate than in other metals, due to comparatively constrained supply in recent years. Prices are therefore expected to ease in the second quarter of this year, but the longer term outlook is positive.