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October 15, 2015

LME Week Supplement: Commodity & Metals

London, 12 October 2015

Welcome to this special LME Week Supplement where we canvas the views of commodity metals market specialists.

The macroeconomic landscape has seen radical changes in the last three months, with substantial shifts in prices and extreme volatility. Across commodity and financial markets prices have gyrated as uncertainty and trepidation have taken hold.

Metals price sentiment this time last year was subdued. Then came another raft of macro and structural news to send prices – of all commodities – substantially lower. So how did the markets veer off course so drastically this year?

“Most importantly, the expected tightness we were expecting to see in a number of metals at this time last year failed to materialize. Demand turned out to be much weaker than expected due to an accelerating Chinese slowdown, while the supply side did not retrench much to make up for it,” according to Edward Meir, commodity analyst with INTL FCStone in New York.

And then came Glencore, putting sharply into focus the problematic debt levels of many in the industry who’s asset values have plummeted. The S&P GSCI Total Return Index lost 19.3% in the third quarter – the 5th worst quarter and the 3rd worst Q3 for commodities since 1970 – 23 of 24 commodities posted negative returns, which only happened once before in Q3 2008.

Disappointing and uneven global growth, highlighting volatility in the emerging markets, suggest a prolonged period of low commodity prices for some time to come.

And the headwinds that have driven commodity investor returns into negative territory are not about to change. Prices have been caught in what market watchers call the ‘negative feedback loop’: – excess production capacity, US dollar appreciation and weaker emerging market economic growth.

Metals Outlook

"If we are correct in our rather pessimistic assessment of China’s economy going into 2016, we are likely to see another down year in metal prices on account of decelerating demand. In fact, as we see in this report, we have global copper demand barely growing this year (up 1.3%) and see 2016 offtake actually dropping. Aluminium demand will grow by half as much in 2016 as it did in 2015 and zinc and lead demand, both of which are expected to contract slightly this year, are expected to do so again next. Nickel demand is also expected to be off slightly in 2016 as well, on account of further pullbacks in stainless production.

"On the supply side, although growth will moderate in most complexes, this will not be enough to balance the market and as noted earlier, five of the six metal groups are expected to be in surplus next year. Moreover, producers are keeping output high by shifting operations to more efficient mines or smelters, benefiting from lower raw material costs (like oil) and beefing up domestic margins through depreciating local currencies, while exporting their excess metal to regional markets (as China has been doing in aluminium and steel).

"On the flip side, as prices drop, output should decline further, but we don’t see supply/demand balances tightening and markets tipping into deficit until perhaps mid-2017 at the earliest. Through all this, we can’t discount bouts of short-covering and counter-cyclical rallies that could set in on dollar weakness (possibly brought on when the Fed is “through” with raising rates).

"In sum, we think the 2016 metals landscape will be similar to what we saw in 2015 – price rallies will be capped by mixed global growth prospects and a poor China outlook. Supply will begin an accelerated downward readjustment as prices grind lower, not a pleasant experience for mining companies, especially those with leveraged balanced sheets."

Edward Meir is Commodity Analyst with INTL FCStone in New York.

Courtesy of Commodities-Now (More from Commodities-Now Here)  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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