Continuing pressure on margins and overcapacity in metals markets

by: Casper Burgering

The global whole-economy PMI edged up to 53.1 in March from 52.9 in February, which left it heading in the right direction but still below the long-term average of the series. World trade was up by 2.5% annualised in the three months to January, putting it well below the long-term average of 6%. However, the PMI’s manufacturing export orders index improved in February and March, suggesting that trade flows are gradually firming. The eurozone should eventually get a lift from the pick-up in world trade growth and reduced uncertainty. The improvement of some economies (China and the US) is leading to an increase in demand for cyclical commodities (such as base metals). Asian economies have been showing a mixed picture and there are increasing downside risks for the region. Fortunately, China – world biggest metal consuming country – is showing somewhat stronger dynamics. Trends in investor sentiment and money flows between asset classes have become more important. In general, slower economic growth prospects gives investors cold feet. Therefore, the investment appetite for cyclical industrial metals has decreased somewhat, especially due to slower Chinese growth in Q1 and worries about its future development.

Forecasts on Industrial Metals (May 2013).
Forecasts on Industrial Metals (May 2013).

Aluminium – Demand in good shape, but oversupply remains

Aluminium prices decreased by 11% since the start of 2013. In the same time period, stocks at London Metal Exchange (LME) warehouses increased only slightly, by 0.4%, thus maintaining their relatively high level. Oversupply will remain a heavy burden for the industry and this limits any strong rebound in market conditions.

Copper – Fundamentally relatively sound

Mainly due to disappointing economic data from major economies, the copper price decreased by 9% since the start of 2013. Prices reacted swiftly to worsening manufacturing and other economic data from the US and China. Stocks at London Metal Exchange (LME) warehouses increased by 95% since the start of 2013, but continue to be relatively low.

Steel – Battle against overcapacity persists

The global average steel price (HRC) decreased by 2% since the start of 2013. The road ahead remains challenging and overcapacity is the key issue to address. Demand in Europe is weak and steel giants with operations in the region took large losses in Q1. In other regions, the economic outlook is more buoyant, but still fragile.

Steel raw materials – Abundant supply to meet demand

Both iron ore and coking coal prices decreased since the start of 2013 by 6% and 9%, respectively. Demand is relatively weak and supply is abundant, especially for iron ore. Downbeat market sentiment and sluggish enduser steel demand continues to hamper raw materials markets. In addition, steel oversupply will remain a protracted burden.

Views on the Chinese economy and Metal end users on page 7-9.

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