Slender signs of stabilisation in the global economy were bolstered in May by Jean-Claude Trichet, president of the European Central Bank, who said on behalf of the G10 central banks: in all cases, we see a slowing down of the decrease of gross domestic product. In certain cases you already see a picking up.
That may be true, but base metal demand shows no signs as yet of scampering back to levels last seen in 2008 or indeed 2007. China's base metal re-stocking has obviously been supporting prices, but in itself is insufficient to take up the slack in the West.
There, demand for copper, aluminium, nickel and zinc will contract in 2009 and in some cases by double-digits. China's economy in 2009 will at best grow by 8%, down from 9% in 2008 and 13% in 2007, and even with current production cuts this evidently spells a period of relatively lesser demand in global terms.
Gold
Gold is trading back above $900/oz again, even though investment flows have stagnated. Dollar depreciation, an underlying fear about the sustainability of the current improvement in the economic mood and a continuing warm fuzzy glow from the Chinese official sector purchases are keeping it up, but for how long?
Silver
Silver rocketed higher in early May on rising economic optimism and firm gold prices. We see it falling back when those fade.
Platinum
European car sales have been supported by government incentives, but there is a lingering fear that these artificial stimuli are no substitute for authentic demand powered by solidly-based economic growth.
Palladium
Does the economic recession mean a boost for palladium in the autocatalyst sector? Everyone knows it is cheaper, but this is perhaps more important when consumers are downsizing their vehicles. Either way, it outperformed platinum in April/May, and may continue doing so if the car markets begin to stabilise and do so in favour of (cheaper) gasoline than diesel.
Aluminium
The aluminium price still looks to us to be some $200/t-$300/t above where it should be. The market is awash with metal, yet Chinese producers are, remarkably enough, bringing idled capacity back on line. The official line is for some 700,000t of Chinese output to resume but this is likely to be rather higher, as long as the aluminium price continues to track copper.
Copper
The biggest surprise in base metals remains the longevity of the rally in copper prices. The short-covering episode has finished, but Chinese imports are maintaining momentum. A correction is almost inevitable during the northern hemisphere's summer months, but we doubt prices will challenge December 2008's lows any time soon.
Nickel
Like aluminium, demand for nickel remains extremely subdued but like aluminium again the price is not reflecting this. The latest closure by BHP Billiton of one of its Australian nickel mines highlights the poor state of this sector, but high prices could tempt some idled supply to restart. The short-term outlook is for prices to remain highly sensitised to supply-side news.
Zinc
Zinc has plenty to gain from the on-going Chinese and US stimulus packages and its price has risen in anticipation. However, industrial activity is about to slacken off even more during the imminent northern hemisphere summer months and this ought to see subdued price volatility, although any further mine closures could offer support. LME lead stocks are still very low, and there could be some upside in the short-term.
Tin
If demand were not so poor, a casualty of the recession, tin prices would be much higher than they are today, as the supply-side news out of Indonesia remains very supportive. As it is, prices are the highest since November, with the past six weeks seeing a strong rally. The underlying tight global physical situation will see tin prices benefit strongly from any indication that the
recession is ending.
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, while early indications for March are worse. China, meanwhile, has been pulling back on its production, leaving a mountain of surplus metal.
