Base metal prices decline 20-30%, crude oil futures fall to an 8-week low as concerns over a possible Greek sovereign debt default reduce commodities’ appeal.
NON-FERROUS METALS
Base metal prices declined between 20 and 30 per cent, with copper, nickel, zinc and tin falling 25 per cent on global demand growth concerns. Most base metals are near their marginal cost of production, except copper, which has a margin of 30 per cent.
In light of the lower economic growth forecasts and the market turmoil in recent weeks, analysts at Citigroup Global Research downgraded all base metal price forecasts. However, from current spot levels, there is little downside possible for aluminium, as its prices are now at the same level as in the last quarter, with very little margin. (Click here for graphs)
Copper prices have corrected 27.4 per cent since August 1, as growth in global demand moderated sharply in recent months. Chinese demand has stagnated over the past few months, due to high prices and moderate growth. In the first seven months of this year, Chinese copper imports were 36 per cent below equivalent levels in 2010.
Analyst expects copper to trade below $7,000 a tonne on a three-month view, driven by weakening global economic outlook and financial uncertainty. Fundamental support for copper could emerge around $6,400, based on the cost of production and a buy versus build analysis.
Aluminium demand has been very strong over recent months, particularly in China. Indian demand growth has slowed and may suffer as the impact of tight monetary policy becomes clearer. Production growth in West Asia slowed but was at 19 per cent in the year till July, as the impact of new capacity additions faded. High-cost producers in China are likely to cut production if prices decline and that will help prevent deeper falls.
A slowdown in global stainless steel production is likely to cut the demand for nickel. Analysts expect usage to grow by four-five per cent in 2011, compared to 15 per cent in 2010. Demand growth should be around seven per cent in 2012, as Chinese demand continues to grow.
Zinc prices weakened sharply since July-end, as sovereign debt concerns added to fears of a global economic slowdown. Zinc retains the weakest near-term fundamentals of major base metals as growth in demand has slowed in 2011.
PRECIOUS METALS
After the big sell-off in nearly all markets in the past several days, gold prices have come off their lows, but confidence that the market is ready to resume its uptrend is not firm. Several market watchers said it will take days, maybe weeks, for the volatility caused by the sharp price drop to even out.
The recent volatility in gold prices is historically high, based on nearly 40 years of data, says HSBC. The drop that was seen in the last week of September was 8.54 per cent and represented a three-standard deviation move. Based on data, this has occurred only seven times since gold became freely traded in 1972, making last week’s drop the seventh-worst week in percentage terms since then.
Investment bank UBS AG (UBS) on Monday lowered its spot gold and silver forecasts to reflect a recent drop in both precious metal prices, but said the potential for a gold price rise remains strong.
UBS lowered its one-month average spot gold price by nine per cent to $1,775 an ounce and its three-month average spot gold price by 7.1 per cent to $1,950 an ounce. It also lowered its one-month average spot silver price 30.4 per cent to $32/oz and its three-month average spot silver price 30 per cent to $35/oz.
Silver’s recovery off its new 2011 low at about $26 is ongoing but at a very slow pace. The rebound from a 10-month low may see fresh resistance at about $33.15 an ounce, according to technical analysts. Prices slumped 28 per cent in September, the most since 1980, as concern about slowing economic growth sent commodities and equities tumbling. Silver prices may see further declines to levels around $25 -$23 on contraction of industrial sector. Almost 80 per cent of silver is used for industrial purposes and only 15 per cent is for investment demand. The metal’s industrial uses include solar panels, plasma screens and chemical catalysts.
MARKETS
The ongoing sovereign crisis in the euro zone, the US debt downgrade and worries about global growth caused a sharp pullback in global equities. The stock market is questioning the sustainability of current corporate earnings and pricing a global EPS contraction of up to 25 per cent for 2012, suggest analysts at Citigroup. Concerns that governments may be running out of tools to keep the global economic slowdown from worsening has left equities from Brazil to Hong Kong and Frankfurt in bear markets.
The global equity valuations are not yet at post-Lehman levels. But that does not necessarily mean they are complacent. The current global equity valuations can be compared to pre-Lehman lows generally reached in early September 2008. The MSCI AC World index trades on a P/BV valuation of 1.6 times, already 20 per cent below the pre-Lehman low.
Current sectoral valuations within the global equity markets compared to 2008-09 suggests that only utilities’ valuations are below the extremes of 2008-09. EPFR Global-tracked Emerging Markets Equity Funds carried a $20.6-billion outflow streak into the third quarter, as rising risk aversion and pessimism about global growth trumped the better growth prospects and sounder public finances offered by many developing countries. It was their worst quarter, in fund flow terms, since the third quarter of 2008. US equity funds have experienced 12 consecutive weeks of net redemptions from retail investors, with actively managed funds bearing the brunt of an exodus that was slowed but not halted by the unveiling of Operation Twist by the US Federal Reserve after its meeting last week. ETF flows during the quarter were marked by a rotation from small and mid-cap funds to large-cap funds.
Retail investors have also been steadily pulling money out of Europe equity funds, with the current streak stretching all the way back to the third week of May, as the currency union’s leaders try to get on top of a debt crisis that is well into its second year. Prior to the third quarter this was more than offset by institutional commitments to German equity funds. Year-to-date, however, the net flows into Germany equity funds remain at $18 billion.
OIL
Crude oil futures fell to an eight-week low, as lingering concerns over a possible Greek sovereign debt default and a firm dollar reduced the appeal of commodities. On the New York Mercantile Exchange, Brent crude futures for November delivery traded at $101.20 a barrel, down 13 per cent in two months. Market sentiment remained downbeat after euro zone finance ministers postponed the release of Greece’s next ¤8-billion tranche of aid until a meeting on October 17.
A look at the weekly chart indicates prices have been moving in a downward sloping channel since April, forming a series of lower peaks and troughs. This is a sign of a medium-term downtrend. The lower end of this trending channel projects downsides towards $90-92 levels over the short to medium term.
The 38.2 per cent Fibonacci retracement of the entire rally from the December 2008 low of $36 to high of $126 in April, is placed around $92 levels.
The Organization of Petroleum Exporting Countries’ (Opec) basket of crudes fell to $99.65 on October 3, down 18 per cent from its highest level this year and within two percentage points of the 20 per cent drop that’s deemed a bear market. Brent oil tumbled 20 per cent from its April high and New York crude 32 per cent. Brent for delivery in 2012 is currently trading at $96.31, according to an average of monthly contracts for the year. That’s 16 per cent less than the $114-a-barrel median of 37 analyst forecasts compiled by Bloomberg.
Crude prices of $70 to $80 a barrel would be “fair” for producers and consumers, Saudi oil minister, Ali al-Naimi, said at a conference in Riyadh on February 22. Now, Opec won’t allow oil to fall below $90 because of the need for revenue to finance social spending, according to Barclays, Deutsche Bank, HSBC Holdings Plc, Societe Generale SA and the Centre for Global Energy Studies.
