As we believe that the European debt crisis will linger in the next six to nine months, adversely impacting China’s growth (exhibit 3), which is crucial towards demands of commodities (chart 1 & 2).
This is why we downgraded our forecasts on metal prices.
As most commodities have a high correlation with oil prices, we believe that tin prices would remain unexciting, in line with world economic outlook. However, we expect recovery in the middle of 2012, as Indonesia’s smelters will continue their export ban until tin prices recover to around the US$23,000 level.
The price outlook for nickel is worse than tin’s, as nickel is not only hit by global uncertainties, but also by high inventories stemming from the nickel boom in 2008. Some new nickel projects may be delayed as the price stays at current levels, particularly as Indonesia’s nickel ore exporters will try to export as much nickel ore as possible, leading up to the export ban which will start in 2014. With its safe-haven status, the price of gold is expected to increase in 2012 as we expect world economic turmoil to persist.
The third quarter 2011 (3Q11) results from metal mining companies showed deterioration in margins from levels in 2Q11 on the back of lower average selling prices in 3Q11 relative to 2Q11 caused by global uncertainties.
Tin producer PT Timah’s export ban dragged the company’s earnings in the first nine months of this year as it stopped selling its tins inventory in the spot market. Earnings of PT Vale Indonesia, formerly PT International Nickel Indonesia Tbk (INCO), in the fourth quarter this year would also be affected by lower production stemming from the shutdown of one of its furnaces in order to increase its production capacity.
Going into 4Q11, we also expect metal sectors to face lower margin year on year as their average selling prices were rising in 4Q10 but are currently falling in 4Q11 (chart 4).
The writer is an analyst at PT Bahana Securities