Base Metals Insights from London

Brian Hicks, co-manager of our Global Resources Fund (PSPFX), is in London this week for the London Metal Exchange’s 2009 Metals Seminar, which kicked off the annual LME Week gathering of leading commodities analysts from around the world. Here are Brian’s notes from the seminar:

Danny Quah, professor at the London School of Economics, gave a compelling presentation that centered on China and the global recovery. His main theme focused on the global economy's shifting center of gravity, which has been steadily moving eastward to China over the past decade. He also mentioned that China isn't dependent upon U.S. consumption to create growth – that notion is an old paradigm from the 1970s. Exports to the U.S. only make up approximately 15 percent of total exports, versus the 40 percent of total exports going to Southeast Asia.

Michael Jansen, director of commodities at JP Morgan, is one of a few who see a V-shaped recovery, given the rapid and unprecedented response to the financial crisis.

Jansen's Copper outlook: Imports to China may halve through the rest of the year, but should still remain at high levels. Scrap is tight, but it has improved. Copper is the "best" way to play the developed-markets recovery given a strong rebound in industrial production. Risks to mine supply remain – 3.7 million metric tons of production is up for contract negotiations in 2009.

Jansen's Aluminum outlook: While it is true there is too much inventory and capacity, Jansen still believes prices may go higher early in 2010 due to potentially large primary buying/restocking. Fabrication demand should pick up due to low inventories.

Jansen's Nickel outlook: A bit of a pick-up in European stainless steel orders has been offset by a slowdown in China. Xstrata has curtailed high cost nickel production and cut costs, bringing down its average cost to $3 per pound. Despite a 20 percent cutback in mine supply, some people I met still think there is too much capacity and more cuts are needed.

Jansen's Zinc outlook: Galvanized steel could pick up materially given that only 50 percent of global infrastructure projects are in place. Chinese auto sales also should be supportive for the zinc market. We could see a 146,000 metric ton deficit in 2010.

Jeffrey Christian, managing director at CPM Group (and author of “Commodities Rising”), highlighted that the lack of credit availability is the biggest risk to the recovery near-term, while slow growth in energy supply is the biggest risk longer-term.

Comments

[dswoope:]

Aluminum added 2M mt in the supply stream, and until transportation segments comes in from the cold, its hard to see a "V" - more like a "W" with its right arm broken. It would help if you bought a six pack on the way home tonight... "cans please"

Oct 15 08:30 AM