According to the latest report of the London-based Economist Intelligence Unit (EIU), the weakness in industrial commodities, which started in the beginning of July, would continue throughout the year as markets increasingly factor in weaker demand from the Organisation for Economic Co-operation and Development (OECD) members.
Given that the economic downturn in the US and a number of key European markets is being led by slump in the housing sector, this will have a particularly negative impact on the demand for base metals.
Prices of industrial commodities rose in the first quarter despite mounting evidence of a slowdown in the US, weaker economic prospects for the OECD countries and turbulence in the world's financial markets.
Indeed, the weakness of the dollar and the rising inflationary expectations were key factors in driving prices higher, as investors increasingly viewed commodities as a safe investment bet.
However, these price rises did also reflect concerns about supply and the relatively low level of stocks at a time when the Chinese demand remained strong. Technical disruptions, particularly power shortages and rising production costs, were hampering supply growth across many industrial raw material markets, EIU added.
However, EIU continues to expect a more marked downturn in the average price of industrial raw materials in 2009. Demand is forecast to remain relatively subdued in the OECD economies as the rehabilitation of household balance sheets continues.
According to the report, additional production of aluminium in the second half of 2008 coupled with weak OECD demand are expected to result in weaker outlook for the commodity.
However, the low level of stock means that any disruption in supply or stronger than the anticipated Chinese demand could propel prices higher.
