2010: A gap year for metal prices - VM Group

According to the VM Group Metals monthly publication 2010 is likely to be the year metal prices take a breather but, the impact of China cannot be underestimated.

Author: Geoff Candy
Posted: Monday , 01 Feb 2010

GRONINGEN -

2010 is likely to be an interregnum period for global metal prices after the heights reached last year and indeed the strong performance throughout the first decade of the new millennium.

This is the view of the VM Group expressed in its January edition of its Metals Monthly publication, put together in collaboration with Fortis Bank. And, while it admits that some of the strong performances put in by metals in 2009 had to do with the sheer volume of cheap money sloshing about in the system, fundamental factors too played a role.

"The most obvious change in 2009 that affected all metals was the realisation early in the year that this recession was not going to be another Great Depression. Economies were contracting in the developed world, but by the end of the year they were growing again, while the developing world, specifically China, wobbled but managed to stay on its feet, and was already growing again by Q1 2009," The group writes.

"If the prices of metals reflect future expectations (and most do) then clearly it was inevitable that they would rebound strongly."

And, while gold appeared in many of the headlines throughout the year, the group notes that it was, along with steel, the worst performing metal over the year, managing a gain of only 25%. "Against that, the best performing - lead - was up 161%, while copper managed a price rise of 151%".

But it cautions, "It's possible that financial and commodity markets have taken too sanguine a view about economic recovery, and the continued strong gold price perhaps is testimony to those deeper underlying fears. Currently we regard 2010 as most likely to be an interregnum of sorts: 2009 was a year in which relief flooded back into markets, while 2011 may well be a year in which other, new fears, of over-stimulated economic growth and inflation. This year may see further price gains, but at a more moderated pace and more attuned to the underlying realities of supply and demand factors."

Indeed, if one looks at the performance of the various metals over the decade as a whole the most striking feature is that for most of the metals, the second half, from 2005 to 2009, was much stronger than the first.

According to the VM Group, while the reasons for this commodity price boom have been discussed at length it has yet to be explained completely satisfactorily.

The group acknowledges the role of the weaker dollar but, adds, "Clearly the powerful economic growth of China and other emerging countries has fuelled very strong demand, and investment interest has taken note of that and latched onto commodities. Investors did not have much else to cheer - the S&P 500 fell 25% over the decade whilst the wider FTSEWorld index lost 13%."

The impact of China cannot be understated, especially in the longer term. But, if one looks at the various shorter term predictions made in the publication it becomes clear that China is likely to play a role in the short term movement of these metals.

This particularly applies to the base metals, where the impact of China either as a producer in the case of lead and tin or as a consumer in the case of everything from, copper and aluminium to zinc, nickel and particularly steel.

For metals like copper, the major risk in the short term is the reaction of the market to a tightening of Chinese lending. This would not only impact real demand but also speculative investment.

"This is a genuine threat, as loose bank lending has lubricated China's strong 2009 GDP growth and any sign of policy tightening is almost immediately reflected in weaker copper prices. The opening up of arbitrage trade should see January's refined imports up on the month and eventually see LME stocks plateau in coming weeks.

On the precious metals side, however, the impact of China is less. And, the prospects for these metals are much more closely linked to the dollar, in the case of gold, industrial demand, in the case of silver and ETFs in the case of platinum and palladium.

Price Forecasts:

Gold - $1,050/oz-$1,150/oz.

Silver - $16.00/oz-$18.00/oz.

Platinum - $1,475/oz-$1,600/oz

Palladium - $400/oz-$475/oz

Aluminium - $2,175/t-$2,320/t

Copper - $7,300/t-$7,475/t.

Nickel - $17,000/t-$20,000/t.

Zinc - $2,200-$2,400/t.

Lead - $2,100-$2,300/t.`

Tin - $17,500/t-$19,000/t.

Steel - Steel Med: $450/t.