The latest quarterly Commodity Companion from Royal Bank of Scotland records that the RBS Base Metal Price Index has since the end of 2008 risen by 20% and is on course for further gains. Despite the fact that there is as yet little sign of any real demand growth, a number of elements have allowed commodities to prosper, and base and precious metals have taken the limelight with oil, natural gas and steel having to take a back seat.The primary factors behind the increase in metals prices so far have been; a) monetary and fiscal stimulus, 2) hefty supply cutbacks) Chinese metals stockpiling and d) the cash-for-clunkers' boost to auto sales.The publication is a comprehensive tome covering not just the precious and base metals, but also bulk commodities, energy and the steel sector, each of which have their own individual profiles. For now, precious and base are where it's at, but there is light on the horizon elsewhere in the sector as we look further out.RBS takes a reflationary view on the economy and is looking for anaemic world GDP growth this year, but is expecting a rebound to 4.0% in 2010. The analysts note that in a volatile world themes, not forecasts, are perhaps most important and that if you are seeking indicators of the upturn in the world economy, then look no further than metals themselves! While platinum and palladium are expected to continue to outperform gold and silver, the favoured base metals are copper, zinc and lead, followed by nickel while aluminium brings up the rear among the base metals. Bulk commodities, however are expected to record hefty declines in annual benchmark settlements. Oil's time in the sun is further down the line but the outlook for natural gas remains forlorn, while steel is expected to stabilise in the second quarter of this year after a tough first quarter.The RBS Base metals Price index suffered a harrowing decline between March and December 2008, falling by 61%, falling in nine months by a degree that has in the past taken an average of 42 months. The snapback has been impressive, with the index rising by 20% since the end of last year and, notwithstanding the worst recession in living memory, investor appetite for risk has returned with commodities the prime beneficiaries.The economic outlook remains fraught with periods, with commodity consumption collapsing, business segments suffering severe growth dislocations and capital expenditure badly mauled. As a result the jury is still very much out as to whether the raft of simulative measures will be able to stop the rot and give the necessary boost to consumer confidence that is necessary to kick-start the world's recession-hit economies. One swallow may not make a summer, but the April Conference Board consumer confidence figure for the US, released after RBS went to press with this publication, recorded its fourth-largest ever increase and the biggest since the fall of Baghdad in spring 2003, with an increase to 39.2 after 26.9 in March.Copper remains the RBS analysts' preferred base metal, and although a large surplus is likely this year, Chinese strategic stockpiling may absorb much of it. An underlying surplus is also expected for 2010, but the market is expected to movie not growing deficit for 2011. The recession has hit copper's project pipeline particularly hard. The study comments that market-driven production cutbacks remain modest, and ever more so compared with other metals. Some 25 price-related cutbacks are however noted in the mining sector and 21 similar restrictions in the smelting and refining sector and copper mine capacity utilisation is still way below historical levels. There have also been a substantial number of project deferrals however and RBS believes that this has contributed to copper's price rebound as far forward prices had been looking too low.Zinc is also one the most favoured base metals, with much more price recovery forecast for later in 2009 and through 2010. Chinese stockpiling also plays a part here, but there have already been deep producer cutbacks that are expected to limit this year's surplus and RBS expects continued producer discipline to tip zinc back into deficit as soon as next year, ahead of a more genuine tightening of market conditions by 2012.The situation is slightly different with aluminium and nickel. Hefty producer cutbacks do at least seem to have brought about some nickel price stabilisation in the first quarter of 2009, with some 21% of world production sliced away, but the metal still faces an onerous inventory mountain with a stock-to-inventory ratio of more than twelve weeks. RBS is looking for a surplus to be sustained even through to 2011 despite producer cutbacks. Aluminium is expected to continue to suffer by virtue of its heavy exposure to the transport and construction sectors and demand is expected to contract by 8% in 2009. Announced smelter cutbacks have amounted to 18% of world supply, but RBS is expecting another market surplus in 2009.All the base metals are expected to sustain price averages in 2009 substantially below those of 2008, with both refined production and consumption fall across the board (apart from lead with respect to consumption), but the recovery is expected to be smart across the sector. This prospect for recovery can be ascribed in part to the consolidation of the mining industry and the rapid enforcement of supply cuts through the exercise of producer discipline in a fabulous example of shared-pain, shared-gain.Copper and zinc price averages in 2011 are expected by RBS to be more than 40% above the averages forecast for 2009 and even though aluminium and nickel are less favoured; their 2011 averages are expected to be more than 30% and 25% higher than their respective 2009 averages.
Join the Discussion