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Fortis Bank Reports
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Metals and plastics - Strategic view
Introduction
After the mauling base metals prices received in Q4 2008, Q1 2009 has seen a
return to growth, but not on any tangible pick up in real demand. In fact it has
been based largely on sentiment that China is on the road to economic recovery
that will in itself compensate for the collapse in Western demand. This has been
supported by successive high Chinese monthly imports of refined metal, leading
to drawdowns in LME stocks, while China's manufacturing purchasing manager
index has crept above the important 50 mark in March, which denotes economic
growth rather than contraction. However, neither are as positive as they seem:
China's imports are to feed its huge state and consumer restocking programmes
while the pick up in PMI is not surprising given that even the most pessimistic
forecasts have China growing at 5%. The rally in base metals has been
augmented by the covering of short positions built up in Q4 2008, which bet that
metals prices would decline further than they actually have. Should real demand
not pick up before China ends its restocking exercise then we expect a sharp fall
in prices.
Gold
Gold is now no higher than it began the year when measured in dollars; in other
currencies it has done a bit better. With the financial and economic outlook
somewhat brightening, the going might get tougher, unless fears of inflation
grow. That the IMF wants to sell 12.9 Moz of gold was not news but the G20
meeting has removed all doubt; the only question is timing.
Silver
Silver still seems to us overvalued, although the recovery in industrial metals
must be having some positive impact on its 'real value'. Investment flows
remain strong.
Platinum
Platinum's recovery continues on the brighter economic outlook and a relative
recovery in European car sales. These have been artificially boosted by
government programmes and will surely fall back later in the year; but for now
they have been helping platinum. Investors have taken note; the potential for a
US platinum ETF is also positive.
Palladium
Palladium in March did even better than platinum, for similar reasons but with
less of an investment boost although Nymex futures net longs are showing signs
of life.
Aluminium
Aluminium at recent price levels looks fragile. Although it is only at levels last
seen at the start of the year, it has increased almost $200/t from February lows to
more than $1,450/t in early April; with short sellers being squeezed out the price
may go higher still. However, the metal's fundamentals remain extremely
discouraging and we therefore expect a significant fall to sub $1,200/t levels
when China ends its current restocking exercise.
Copper
Copper likewise is due a fall. Sentiment has been boosted by the large inflows of
refined metal into China, with the copper price rising by more than $995/t in Q1
2009 to set a high of $4,160/t on 27th March and more than $4,400/t in early
April. This rally has been based on factors that do not spell long-term recovery,
such as China's State Reserves Bureau (SRB) restocking, dwindling scrap
imports, and the consequential arbitrage trade between the higher Shanghai price
and that of the LME. Resultant short covering has left the price overvalued by at
least $1,000/t, in our view.
Nickel
Growing LME stocks, rising prices and poor demand from the stainless steel
sector leaves nickel out in the cold and due a fall. There is not much besides
potential SRB stockpiling and sentiment that will support prices, although the
price may spike on short covering. After already cutting 20% of mined output as
a proportion of total 2008 production, miners may be faced with making further
painful cuts in order to rebalance the market.
Lead and zinc
Zinc has similarly benefited from SRB re-stocking and resultant high imports,
and the price has gained almost 19% since the start of the year to early April.
Production cuts have been fierce and the still low price may force further
marginal operations to close, especially since by-product acid prices have
collapsed, which has hit smelter profits further. This should keep prices closely
tied, but above $1,100/t. Lead's relative strength in recent weeks has been
almost entirely based on demand from the replacement battery sector. This
seasonal demand is drawing to a close. The price of lead is up a whopping 28%
since the beginning of March, leaving it exposed to a sharp correction.
Tin
Lower production and high imports in China have supported the tin price, which
is still some way off its long-term average. However, with Indonesian tin exports
up 29% year-on-year in March, the risk is to the downside.
Steel
Crude steel production has been cut severely as orders have dried up, while
prices have remained depressed, despite a slight rally in late March and April.
World crude steel output fell 22% in February to 84 Mt, early March indications
are worse. China, meanwhile, reined in its production in February, as the
anticipated stimulus-led increase in demand did not materialise, leaving a
mountain of surplus metal from January.
Plastics
Supply disruptions on top of voluntary cuts have seen a tightening of the
polymer market and hence a strengthening of plastics prices across the board.
However, demand is still weak and any gains may be short-lived.
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