Demand for commodities to fall: analysts

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

31 Dec 2008

Prices for Australia's most valuable export commodities including iron ore and copper are expected to tumble next year as demand for the metals contracts in line with slowing global economic growth. Analysts unanimously agree commodities demand and prices will remain weak in the first half of 2009 - prompting further mine closures and sector consolidation - as the world-wide financial crisis continues.
But the strength of the resources sector, which is inextricably tied to China's growth, could be bolstered later in the year if the Asian superpower's 4 trillion yuan ($A853.9 billion) economic stimulus package kicks in, some analysts say.
"Metals markets, which tend to preempt recoveries in the order of three to six months, may start to price better from June, with the idea that demand conditions will improve in 2010," ANZ Bank head of commodity research Mark Pervan says.
"By the end of mid next year, the US dollar will not get much stronger, which may trigger some more buying into commodities."
Most analysts agree that global economic growth will improve in 2010, supporting demand for metals and energy once again.
China's appetite for base metals such as iron, nickel, lead and zinc was insatiable in 2007 amid one of history's most rapid urbanisations but sharply deteriorated in 2008 as its economic growth slowed.
The Reuters/Jeffries CRB Index of 19 materials was down more than 50 per cent in December from a record high in July, reflecting dramatically reduced demand for commodities.
GFMS Metals Consulting says sentiment towards base metal demand is now bearish worldwide due to sharply lower carbon and stainless steel production.
Steel demand has slumped after a dramatic slowdown in construction in China following the Beijing Olympics and more recently, a downturn in the automotive industry.
"The `buyers strike' for industrial metals continues," GFMS says.
"This reflects a combination of the credit crunch, the economic downturn and de-stocking in anticipation of even lower prices further down the line."
Since July, nickel and zinc prices have fallen 60 per cent and 55 per cent respectively, followed by copper with a 52 per cent fall.
Mr Pervan says the copper price is likely to fall further but could rebound, along with nickel and zinc, towards the end of 2009.
Reduced supply of these metals following many mine closures this year has not been reflected in prices, so there is room for improvement, he says.
Markets for these metals were "vulnerable to a supply squeeze when conditions improve", Mr Pervan warned.
As for iron ore, the benchmark price is expected to drop between 10 and 50 per cent in 2009 as Chinese steel mills play hardball to mitigate the almost 100 per cent price hike negotiated this year by mining giants BHP Billiton Ltd and Rio Tinto Ltd.
Even the most bullish iron ore miners and explorers believe the large price rises of recent years cannot continue.
Mr Pervan concurred with a forecast by broker Morgan Stanley that iron ore prices could fall by up to 50 per cent in the next three to six months amid pressure from low-margin Chinese steel mills seeking to lower their input costs.
Most analysts say the benchmark iron ore price will drop 30 per cent.
"The iron ore market looks particularly vulnerable because it's so heavily leveraged to China," Mr Pervan says.
"The risk is on the downside as further steel production cuts come through."
However, Chairman of iron ore explorer Centrex Metals Ltd, David Lindh, says many Chinese steel mills have returned to full production.
This view is supported by China's largest iron ore importer and trader, Sinosteel Corp, which said in December the market for the steel-making input was recovering and it wanted to accelerate shipments from Australia.
The spot iron ore price has dropped by about 30 per cent in the past six months, falling below the $US100 per tonne benchmark price, as stockpiles grew after steel mills deferred and cancelled shipments.
Atlas Iron Ltd Managing Director David Flanagan says the gap between spot and benchmark prices is closing, a sign that the ferrous metals market is starting to rebound.
This is because interest from large international groups in Australian iron ore remains strong.
Many Chinese steel mills took high equity positions in Australian iron ore miners and explorers as their shares languished in 2008.
Positioning themselves for China's upturn, these mills began signing offtake deals again in December to secure future supply of the bulk commodity.
Stockbroker Hartley's says Wuhan Iron & Steel's $190 million recent investment in Centrex "bodes well" for other Australian iron ore projects.
"The deal indicates that Chinese steel mills are still willing to do deals and have a long term view on the sector, and are still looking to secure offtake," the broker says.
The outlook for gold is less clear.
The gold price hit a record $US1,011.25 an ounce in March but fell to $US712.50 an ounce in October - despite the precious metal's traditional role as safe-haven investment in troubled times.
Resources specialist Peter Arden, of stock broker Ord Minnett, says gold was largely ignored as investors flocked to the weak - thus affordable - US dollar.
"It was pure panic - people didn't trust commodities anymore," Mr Arden said.
China, which usually buys a lot of gold, played a large role in diverting funds to US dollars, perhaps to prop up earlier investments in US bonds, he said.
Mr Arden says global economic stimulus packages could support a return to gold investment, tipping gold price to approach $US1,000 an ounce by the end of 2009 or in early 2010.
Morgan Stanley estimates the yellow metal will average $US950 an ounce in 2009, while the Australian Bureau of Agricultural and Resource Economics (ABARE) has flagged $US810 an ounce.
Few new gold mines have started up and some have closed, so supply is expected to remain tight.
The oil price was extremely volatile in 2008, peaking at $US147.27 per barrel in July then falling about 74 per cent to $US38 per barrel in December - a four-and-a-half-year low.
The dip was the first since 1983, according to the International Energy Agency (IEA), which predicts oil demand in 2009 will be 86.3 million barrels a day, up from 85.8 million barrels a day in 2008.
AMP Capital Investors head of investment strategy and chief economist, Shane Oliver, says falling oil prices were one of the signs that the global economic recovery was falling into place.
Broker Merrill Lynch said the most likely average oil price in 2009 was $US50 a barrel, while ABARE said it should average $US59 a barrel.
The Organisation of Petroleum Exporting Countries, which represents nations producing about 36 per cent of the world's oil, cut output by a record a 2.2 million barrels a day - or seven per cent - in December in a bid to increase the oil price.
However, market analyst Savanth Sebastian, of broker CommSec, says OPEC member nations will not necessarily comply with the directive.
Non-OPEC output will rise very slightly in 2009, the IEA said.
Mr Pervan sais a supply response from Russia could be the "wildcard."
"However, the weight of negative economic news, importantly out of China, is likely to keep any recovery short."
New York-based independent energy analyst, Bernie Picchi, says there is a slim chance the crude oil price could drop to $US30 per barrel for a short time, but the long-term outlook was $US60 to $US80 a barrel.
Futurist Dr Paul Higgins forecasts a narrower range of $US35 to $US60 a barrel.
He says a change in vehicle-buying habits in the US - which uses one-third of the world's oil - helped cut demand.
But Mr Picchi says the world has been slow to wean itself off oil and other fossil fuels.
He says the current cyclical retreat in oil prices could provide a "breather" for many years that will give industrialised countries time to examine and implement energy efficiency and production policies.
This was much needed, "because when energy demand growth resumes, the next oil crisis could be more severe than the current one".

Source: The Age