Commodities to rise in 2010

Brendan Ryan | Mon, 28 Dec 2009 11:25
[miningmx.com] -- BOTH UK research consultancy GFMS and UK brokers Fairfax IS (Fairfax) have turned bullish on forecast metals demand from China during 2010, with Fairfax also predicting strong gains for mining equities. According to Fairfax’s outlook for 2010, “mining equities are set to storm through the 2010 earnings season driven by strong gains from commodities, currencies and rationalisation gains”. The Fairfax report said better news was coming from the United States and China. It added commodity prices “look set to gain further as global growth recovers from the shock of the credit crisis. “Equity raised in 2009 to repay debt effectively reduces the burden of borrowing costs. Industrial demand for metals is rising as Asian economies find new growth, while the US and the Eurozone post some recovery. “The US home sales figures could provide new strength to an important market which has been decimated by the impact of the credit crisis. “Other developing economies are also posting GDP [gross domestic product] growth and appear to be following China into a new era of Western-style economic development. Some of this is funded by money out of China, some by continuing low interest rates and some by the ongoing globalisation of economies in general.” GFMS metals consulting MD Neil Buxton said the Chinese stimulus package had massively boosted domestic demand and more than compensated for the earlier decline in exports. He said: “The influence of the Chinese government’s stimulus package is perhaps best reflected in the surge in fixed asset investment. The latest data estimate growth in November at 32.1% year-on-year. “This critical indicator has now posted 30% plus gains since May. Domestic banks have raised lending in line with the government’s policy, and this has offset the slump in external demand. “In turn, this has filtered through to a dramatic revival in Chinese industrial production. Output registered a 19.2% year-on-year gain in November up from 16.1% in October.” Turning specifically to copper, Buxton said: “The bottom-line is that the decline in Chinese imports is likely to be temporary. This is borne out by the initial estimates for copper trade in November, which show that imports rose sharply. “Imports of copper - including anode, refined copper, alloy and semi-finished products - increased by 10.3% month-on-month in November to 290,158 tonnes. “The other key question concerning the inventory build within China is whether high prices will see this material come out of the woodwork. First, we believe the inventory build needs to be seen in the context of a 5 million tonnes (mt) annual consumption and therefore is not that excessive. “Also, despite the higher copper prices, this excess metal does not appear to have been sold back onto the market.” Buxton said estimates of the copper stock build in China ranged from 400,000t to 1mt. He said: “We tend to go with the lower figure as a lot of the imports of cathode earlier this year were essentially replacement demand for scrap.” Fairfax said it expected China to become the world’s largest vehicle market during 2009 with car sales likely to jump 35% and then increase by 20% on average annually from 2010 to 2014. The brokers estimated the stimulus package would increase Chinese demand annually during 2009 and 2010 by 8% for steel; 15% for copper; 8% for aluminium, 18% for zinc and 7% for nickel. Fairfax believed China would increase its strategic stocks of commodities during 2010, citing statements from China’s commerce ministry. The brokers said: “Some commentators are concerned that China might use its commodity stockpiles to shut its doors to Western producers and to collapse commodity markets. “This scenario seems highly improbable to us unless there is a major trade war. Again, this seems unlikely given that trade spats have been well restrained to date.” Fairfax concluded: “Any upturn in the US, Japan and the Eurozone could cause substantial drawdown of commodity stocks even at relatively high price levels. “When you take this view, it becomes clear why China is so keen to finance commodity stocks even at these levels. “If the world returns to coordinated global GDP growth, then the current surplus stock of LME [London Metal Exchange] and other commodities will not take long to run down to critical levels.”