November 6, 2008 – The "stronger-for-longer" demand picture for base metals is now taking a
backseat to the global credit crisis, according to Wellington West
Capital Markets analysts Steve Parsons and Catherine Gignac.
The "stronger-for-longer" demand picture for base metals is now
taking a backseat to the global credit crisis, according to Wellington
West Capital Markets analysts Steve Parsons and Catherine Gignac.
In
a note to clients, they wrote that the global credit crisis is putting
clear cracks into the Chinese demand picture, and it is now clear that
China cannot single-handedly support metals demand. Despite the large
infrastructure build-out ongoing in China, they do not think it will
bring any immediate relief to prices.
"China's GDP had showed
remarkable resilience to the downturn in the U.S. housing market — that
was until the credit crisis derailed China's economic engine," they
wrote.
They noted that another factor that will drive down
prices: weak currencies in the major copper-producing countries. That
means lower marginal costs, which provides further room for prices to
drop.
However, they also believe that the current crisis, which
is is forcing companies to curtail production and close mines, provides
support for long-term strength in prices. They are forecasting prices
beyond 2013 of US$1.80/lb copper, US90¢/lb zinc, and US$7.50/lb nickel.
"The
actions taken by producers to pull metal off the market should serve to
moderate the surplus conditions. We contend that this effect coupled
with the enduring effects of a skilled labour shortage, general
deterioration of deposit quality, and industry consolidation should
provide ongoing support for our longer-term view," they wrote.
They
cut their short-term metal price assumptions, but left their long-term
prices largely unchanged. They also cut target prices on a number of
companies due to the weaker near-term outlook.
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