BASE METALS Metal Copper
Aluminium Zinc Lead
Nickel Tin
INTL FCStone, October 2012
plants and real estate to cover loan payments. As a result, many are reluctant to borrow further until
they get back on a firmer financial footing. This also explains why we are seeing mounting stockpiles in a number of metals and other raw materials, as the demand is simply not there to soak-up this excess. What is really needed, is for unproductive assets to be cleared out, closed down, or written off. And what of the Chinese consumer that was supposed to
usher in a wave of new spending? Much of this is obviously taking place, as incomes and spending power have both risen dramatically over the past decade (as have retail sales). However, a closer look at the numbers reveals that Chinese consumption makes up only about 35% of the country’s GDP and, in fact, has been falling over the past 15 years from a high of 50%. The reason is not because Chinese consumers are spending less, but rather, because the government’s share in the economy (as reflected by fixed asset investments) has soared, elbowing out consumption and exports in the process, and making the economy dangerously dependant on public spending. In summary, we believe that government spending
works well if it is targeted, sufficient in size, and eventually withdrawn after the private sector is strong enough to replace its impact. In either case, it should not be continued in perpetuity, for it risks making sectors of the economy wards of the state. We see these signs flashing in China, which is why we suspect that growth in 2013 will very well be much like it is in 2012 – much more modest in scope – with demand being generally unresponsive to the credit stimulus being offered until some of the unused capacity in the economy is dealt with. What all this means for metals, is that we are going to
see bouts of buying followed by equally intense selling spasms when the storm clouds return. Right now, there is something of a thaw in that European yields have fallen sharply. However, we have our doubts that rates will stay where they are or that another crisis will not resurface. Part of the problem lies with the medicine being
offered to the patient; austerity measures sound good in theory, but work only if a country’s has access to its own currency, which it typically devalues and uses to export its way of its slump (as Russia and Argentina both did after defaulting in the 1990’s and which Iceland is doing now). Since having one’s own currency is not an option for Eurozoned Europeans, it is hard to see how growth can be achieved operating in austerity mode alone.
74 December 2012
INTL FCStone Base Metal Price Forecasts (US$/t) 2013 High 8,900 2,380 2,450 2,600
2013 Low 7,200 1,780 1,850 1,900
23,200 25,500
16,000 18,500
Average 8,000 2,000 2,100 2,200
18,500 21,000
Additionally, other deep
structural issues still need to be addressed, such as suffocatingly high tax rates (now 75% in France for top earners), rigid labour laws, and a glaring need for uniformity in banking and tax regimes. Targeted stimulus spending and tax cuts would also help, as would a weaker
Euro, particularly for countries like Greece, where tourism remains the primary export. We think the metals price outlook in 2013 will be
very much be like 2012. Trading ranges will remain compressed, with the upside limited by a moderate growth environment and a stronger dollar that will retain its safe- haven status in times of crises, likely triggered by bouts of European seizures. And bouts of central bank easing, such as what we saw transpire in August and September, could lead to substantial price spikes as well, but we suspect their impact will fade over time. The metals that we think will do better on a relative
basis in 2013 are copper, lead, and tin, as neither one in this group is saddled with high inventories. In addition, the supply response in these complexes tend to be more inelastic, meaning that it is difficult to coax incremental units into the market due to various constraints unique to each. The three metals that could lag in 2013 are aluminium, zinc, and nickel. All three are on track for another surplus this year (and next) and carry large stockpiles. Although zinc and aluminium holdings are tied up in financing deals, they nevertheless have the potential to snuff out rallies. Moreover, zinc and nickel are “steel plays”, a sector where we suspect things will get much worse before they get better. The low interest rate environment will ensure that
financing metal remains in vogue, especially given the fact that major warehouses are now owned by either banks or sizable producers with access to cheap credit. Outside of these variables, there are possible ‘Black
Swan’ events that could muddy the outlook, such as a possible Israeli strike on Iran sometime in 2013. I wish we could sound a bit more upbeat (or downbeat
for the real Cassandras out there), but our underlying assumptions do not add up to a very compelling story for either the bulls or the bears going into 2013, but rather, make the case for another sideways slog very similar to what we have seen so far in 2012. •
Edward Meir is Commodity Analyst with INTL FCStone in New York.
www.intlfcstone.com
INTL FCStone Inc. and its affiliates assume no liability for the use of this
information and expresses no solicitation to buy or sell futures, options on futures contracts, or OTC products.
A longer version of this article first appeared in the LME Week Supplement 2012 produced by Commodities Now.
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