Commodities | Mar 06 2009
By Chris Shaw
Central and Eastern Europe is the latest region to be hit hard by the global financial crisis and as Danske Bank points out, the further the downturn spreads around the world the worse is the demand outlook for commodities.
To account for the current demand and stock supply situation and the potential for the global economy to weaken even further, the bank has cut its commodity price forecasts but it continues to advise its clients to take advantage of the current weakness to lock-in exposure to the commodity sector.
Supporting its view the bank points out the news is not all bad as the Chinese PMI (Purchasing Manufacturers Index) has now recorded gains in three successive months and the US ISM (Institute of Supply Managers) Index also is showing signs of having bottomed.
Danske bank suggests if the latter is the case, and it expects a recovery in the ISM Index to the 40-45 point range by the middle of the year from its current level of 35.8, and the data from China are able to continue the current trend, this will create a more constructive environment for commodity prices. Under this scenario Danske Bank’s view that prices will be higher in the second half of 2009 would be confirmed.
In particular, Danske notes metals such as zinc, nickel and aluminium are trading below the marginal cost of production, so any pick-up in demand or a further cut to supply puts price risk to the upside. At present that isn’t the case as while producers are continuing to reduce ouput their moves are being outpaced by the fall-off in demand.
Nowhere is this more evident than in the aluminium market as the bank notes year-to-date LME aluminum stocks have increased by 37% or more than 880,000 tonnes and now stand at a bit over 3.2 million tonnes. This means that current stockpiles equate to more than 100 days of consumption. No prizes for guessing increased inventories have translated into price weakness for aluminium, with the metal’s price returning to levels of the early 1990s.
This implies producers will need to further slash output to keep pace with the collapse in demand, a not surprising outcome given the bank notes the 90th percentile of the production cost curve stands at US$2,000 per tonne. This is significantly above the current spot price of around US$1,400 per tonne.
As a result, Danske Bank doesn’t expect prices to recover until stocks first stabilise and then begin to drop, an outcome it expects will begin to emerge in the second half of the year. The problem for aluminium is as prices rise there is a lot of idle capacity waiting to come back online. This, suggests Danske Bank, will cap any upside.
While there appears further potential for aluminium prices to fall in the short-term, the copper market is showing signs of recovering earlier. Danske Bank suggests the better PMI numbers in China could be a sign demand is beginning to improve. This will assist in stabilising stocks of the metal.
This is particularly the case given an increase in cancelled warrants for the metal, which is part of the process of indicating stock held in LME warehouses is to be prepared for removal. Any resulting fall in copper stocks should provide a boost for the metal.