Analysis: Metal prices: Lackluster

Positive sentiment on the IMF’s move to increase European bailout by US$600 billion, which brought all commodity prices up year-to-date (exhibit 1), is not warranted in our view, given weak metal demand on China’s lower consumption and a worsening world economic growth outlook.

Following the World Bank’s cut in 2012 global growth, from 3.6 percent to 2.5 percent and Europe’s growth from 1.8 percent to negative 0.3 percent, the IMF has also reduced world growth from 4 percent to 3.3 percent with Europe’s growth from 1.1 percent to -0.5 percent (exhibit 2 & 3) on its negative outlook of Europe’s debt restructuring process.

Additionally, S&P has cut 9 eurozone countries’ ratings (exhibit 4) as it believes that some eurozone countries’ ability to repay their debt would be affected by their mounting current debt. Another great concern is the current overstocking in China’s housing market which reportedly would take two years to clear out.

We note that commodity prices generally have the propensity to follow their fundamentals, which would be dependent on global economic growth outlook, rather than short-term sentiment on liquidity. While higher metal prices (tin is currently 4 percent higher than our 2012 average price forecast) provide trading opportunities, we remain negative over the medium term on commodity demand outlook given continued uncertainties in Europe, which in turn would bring negative impact on China, Europe’s largest trading partner and the world’s greatest consumer of commodities.

With economic slowdown in Europe, sluggish American economy and lower Chinese metal demand, the metal prospect is bleak. However, highly correlated with the oil price, which has increased 1 percent ytd on supply concerns due to the US-Iran conflict, base metal prices have jumped 8-14 percent ytd.

Nevertheless, once the Middle East situation improves, we expect the 2012 average Brent oil price to reach $105/ bbl, -4 percent y-y, 5 percent lower than current levels. This will in turn bring the average tin price to $21,344/ton, -18 percent y-y. On nickel, we expect average price of $20,501/ton, -11 percent y-y, versus $20,577/ton at present. Given the prospect of lower metal prices, we advise investors to underweight the sector, which is exposed to the full-force of the vagaries in the global economic uncertainties.