Investments are flowing into power sector and automotives. Construction activity is picking up

Print this page Posted on : 08-25-2009 by recycleinme.com

G. Chandrashekhar

Washington DC, Aug 24

There is now growing evidence that global macro-economic environment for the base metals complex is turning increasingly constructive. Despite economic slowdown and recession fears, China has been providing a major boost to the complex with its ravenous appetite.

No signs of slowdown

While the Asian major is not showing any sign of a slowdown, other traditional consumers may enter the fray soon. The manufacturing sector in the industrial regions of the world is showing signs of a rebound in activity. In particular, investments are flowing into power sector and automotives. Construction activity is picking up. The strong positive correlation between economic growth and metals consumption is too well known. Apparently, stimulus packages are beginning to show results.

Consensus is now building that re-stocking within the OECD (a group of industrialised countries) area is sure to boost base metals demand and, thereby, prices. The latest OECD leading indictors provide a good guide to future price direction for base metals.

New wage deals

It is not only that the demand side is looking robust, issues on the supply side are coming to the fore. Labour contract negotiations are going on, and experts feel there is potential for dispute and, thereby, supply disruption.

Metals companies in countries such as Canada, Chile and Peru are negotiating new wage deals with labour unions. It must of course be stated that talks are still going on and there is currently no labour action.

Heightens risk

Although mere existence of contract negotiations does not imply a disruption to output, the rising metals prices have heightened the salary/bonus expectations of miners. This has, in turn, heightened the risk in the market place, should negotiations fail and market alignments get distorted.

There is belief that copper and nickel are two metals that have price risk to the upside. According to Barclays Capital, copper is evidently the key risk in 2009, with close to 29 per cent of global mine capacity being paced at the peril of potential fallout from contract negotiations. Next is nickel in which 13 per cent of mine capacity is under labour negotiations.

International copper

Meanwhile, the latest International Copper Study Group data point to a refined copper deficit of 1.5 lakh tonnes over the first five months of 2009.

Interestingly, there has been a fall in the world demand (ex-China). On the other hand, Chinese copper usage was 3.0 million tonnes during January-May 2009, significantly up from close to 2.1 million tonnes during the same period in 2008.

Obviously, the strength of the Chinese demand was more than enough to offset fall in rest of the world demand. The Asian giant is believed to have made off-market stock building of refined copper since the beginning of the year.

Source : Business Line