Globally, data point to a return to normalcy, acceleration of growth.
While most metals fell four-six per cent on the London Metal Exchange (LME) today and crude oil was at a seven-month low on Germany’s decision to ban speculative trading, analysts say the underlying demand in most commodities hasn’t changed.
This despite commodity prices falling 10-20 per cent since the beginning of the current financial year due to sovereign debt concerns in some European countries.
| LOSING STRENGTH | |||
| $/tonne | Apr 01, '10 | May 19, '10 | % chg |
| Zinc | 2,370.00 | 1,823.75 | -23.05 |
| Lead | 2,182.50 | 1,740.00 | -20.27 |
| Nickel | 25,475.00 | 20,860.00 | -18.12 |
| Copper | 7,881.00 | 6,470.00 | -17.90 |
| Brent Crude* | 83.88 | 73.29 | -12.63 |
| *$/bbl Source: LME,Bloomberg | |||
London-based Natixis Commodity Markets said: “Despite worries about sovereign credit problems in Europe and Chinese monetary tightening, indications are that global growth has been steadily strengthening in recent months, with the bulk of economic data pointing to accelerating growth. Apart from emerging markets and China, many OECD countries have been enjoying upward growth trajectories, as some degree of normality has returned to global economic conditions.”
“There has been unwinding of long positions in the futures market by financial institutions and that has brought down metal prices on the LME,” said B L Bagra, director, finance, National Aluminium Company. “We believe prices should recover in one to two months.
While the market sentiment suffered from concerns over the eurozone fiscal crisis, the sentiment was further spoilt by Friday’s announcement from the China Banking Regulatory Commission that banks had been told to strictly control lending to the newly-formed local government-backed investment arms and to new projects of existing investment vehicles.
Even prices of polymers and petrochemicals have been falling since April. The global petrochemicals index prepared by Platts, the premier provider of data on energy markets, fell from 1,262.4 points in the beginning of April to 1,164.6 points last weekend, following the fall in crude oil prices.
“The demand for petrochemicals and polymers has not been affected much in the euro zone and refineries are operating at 85-90 per cent and even 100 per cent capacity. Sovereign debt issues have not affected end-use demand for these products and end-users are not panicking,” said Ilana Djelal, Platts’ managing editor, Europe.
High physical demand premiums
Despite these economic uncertainties and subsequent weight on prices, Barclays’ commodity report says, “There have been few signs in terms of immediate feed-through into weaker physical market conditions. London Metal Exchange inventory trends remain supportive, with the majority of the complex (except for lead) seeing a net decline in stock levels over the past week”.
Physical market premiums for metal in both Europe and the US are still close to the highest levels seen this year. The premiums indicate strong demand in the physical market.
For example, European premiums for aluminium are currently at their highest in over a decade, as spot market conditions are extremely tight given the significant amounts of material tied up in financing deals and firm demand. Spreads for LME copper and aluminium, in particular, are on clearly tightening. While the focus of the market is on the broader macroeconomic systemic threat offered by the European debt issue, with resulting contraction in both risk appetite and liquidity, Barclays says, “It is important to acknowledge that specific base metal market fundamentals do not justify the significant price declines we have seen over the past few weeks”.
Shakeel Ahmed, chairman and managing director, Hindustan Copper, said, “Copper prices are unlikely to be affected by the crisis in Europe. For copper, China is the biggest consumer and the US the second biggest. Europe consumes whatever it produces. So, the crisis will not have a significant long-term impact on prices.” But, sentiment is obviously affected. Prices were flirting at $8,000-levels, since down to around $6,500. China’s tightening has also had an impact.
“We are watching how things shape up in coming months. However, weak players in the petrochemicals industry have been forced to take some difficult decisions, including asset rationalisation. A weaker euro has been helping them export these products. The real challenge could be demand from China, as reports suggest huge inventories of petrochemicals there,” said Ilana of Platts.
