South Africa: Demand for Base Metals 'May Fall'

DEMAND for base metals is likely to contract as the world economy slows and investors ignore short-term supply disruptions, according to two separate reports last week. Both Natixis Commodity Markets and Merrill Lynch are forecasting surplus production in aluminium, copper, lead, nickel and zinc this year and next year. "Both the breadth and the depth of the current financial crisis are significantly larger than anyone could have expected and contagion to the real economy is now occurring at full speed," Merrill Lynch said in its latest commodities research report. But in the longer term the US government bail-out of financial institutions would be inflationary and although it would probably take more than two years, industrial metals prices would react to resurgent demand, Merrill Lynch said. Natixis said in its fourth quarter metals review that demand growth had already peaked when base metals prices touched fresh highs earlier this year and this made it hard to explain the move of the cash copper price to $8985/ton and aluminium to $3292/ton in early July. Earlier in the year supply disruptions buoyed prices but there was now less news about strikes and technical problems. Even when there was an announcement, such as BHP Billiton and Xstrata cutting nickel production, it had done little to buoy prices, Natixis said. Merrill Lynch said although the origins of the crisis lay in the US housing market, economic data was also disappointing in Europe, parts of Latin America and Asia. Even if emerging market growth prevented a widespread global recession, demand for new power projects, real estate or cars would tail off. Demand for copper, aluminium and other base metals depended on how fast the economies of China and other developing markets decelerated in the next few months. At the very least there would be a period of slowing demand for industrial metals, leading to rising inventories and lower prices. Merrill predicted that aluminium could drop to a low of $1900/ton in the first quarter of next year.