Barclays Capital Commodities Research analysts forecast a dire near-term outlook for the global economy and metals demand.
For most metals, we see barely, if any, growth in global consumption over the next six months and we highlight the growing risk that global demand may begin to contract, they advised.
In Barclays' recent Metals magnifier report, the analysts noted, Over the past few weeks, the macro outlook has worsened further, and there is not even a glimpse of bottoming in key macro specific indicators.
Meanwhile, market surpluses are building fast with aluminum and nickel inventories at 10-year highs, while copper, lead and tin stocks remain well below the peak of the previous cyclical downturn. Although production cuts have been quick to emerge, for most metals, production needs to be pared back further, so prices may yet need to trade deeper into cost curves.
The good news is that metal production cuts are still rapidly mounting. The volume of production cuts in response to low prices is substantial, and the speed at which cuts have been made have been encouraging, the analysts said. Further, for many metals, mine cutbacks are being met with smelter cutbacks, which we believe is an encouraging development that highlights producer production constraint-a characteristic that has so often been missing, leading to the large metal surpluses of the past.
Barclays suggested smelter responsiveness to low prices will prevent huge metal market surpluses from forming during the current economic downturn. They also believe copper and zinc prices will be the quickest to recover.
The analyst found that aluminum consumption has deteriorated at a startling pace and the evidence is mounting to suggest that any recovery is a long way off. We believe global consumption is now declining.
Given the potential for more aluminum stock increases, Barclays anticipates a further downside to aluminum prices over the coming months, though with 60% of the industry currently operating at a loss, the scope for further big price declines is limited, in our view.
Meanwhile, while supply problems are positive for the copper market, the analysts declared that the demand outlook is very poor indeed, and we expect inventory levels to continue to grow substantially in Q1, which were forecast to the trough for quarterly average LME prices at $2,900/t. However, they added, a strong recovery in prices is likely in late Q2.
While lead prices have had a strong start, Barclays expects the biggest downside risk to prices in the second quarter when we expect the bulk of this year's surplus to develop. While newer lows could be tested, we see only limited downside from recent lows, given that the gloomy demand has been largely priced in and the continual tightening of the concentrate market due to zinc-related cutbacks.
The near-term nickel price outlook remains weak, according to the analysts. Despite ongoing reductions to nickel supply that gain traction through H2 09 and into 2009, demand from the key end-use sector (stainless steel) remains very poor, while LME stocks have ballooned further, highlighting soft demand conditions.
The analysts also noted that stainless steel demand remains very bleak and a recovery is nowhere in sight. ...While the level of de-stocking implies that a rebound is in the offing, we think this is unlikely until later on in H2 09.
Meanwhile, Barclays forecasts that the tin market will post another deficit this year. The supply side remains problematic, although this has been partially offset by the contraction in demand and LME stocks more than doubling from their 2008 lows of 3Kt in November to 8Kt.
Tin supply side problems appear unlikely to dissipate in the near term, the analysts advised.
No near-term improvement in global zinc demand is anticipated, prompting Barclays to forecast that global consumption will remain weak during the first half of this year. Despite this, our forecast surplus for this year has fallen due to yet more production cutbacks. Cuts by both smelters and mines are mounting fast and, importantly, some of these closures are permanent.