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Posted: October 17, 2008, 8:07 AM by Jonathan Ratner
Slowing growth in China and a recession in the developed world means metal markets are much more likely to move into significant surpluses in 2009 and 2010. As a result, RBC Capital Markets has made widespread cuts to its commodity price forecasts – everything from iron ore and coal to uranium and copper.
“A dramatic rebound in growth in China based on continuing urbanization and infrastructure building could pull commodities out of this downturn more quickly and dramatically than in previous cycles,” the firm’s analysts said in a report. However, they believe commodity prices will remain under pressure during the next 12 months.
While the huge sell-off, attractive valuations and seasonal affects could support a rally in mining stocks before the end of 2008, RBC does not think one can be sustained until global economic conditions improve. As a result, it continues to like bulk commodities like coal, iron ore and uranium over the metals.
It also sees an opportunity emerging in molybdenum given that current conditions could produce project delays that could keep the market tight despite weakening demand.
RBC is forecasting a rebound in demand in 2010 based on the average recovery following the past six recessions since 1960. For example, while aluminium prices declined 5.1% annually on average during a recession, it rebounded 6.8% in the following year. Copper saw a decline of 3.0% and a gain of 7.3%, respectively. Nickel also dipped 3.0% but then rose 9.4%, while zinc fell 4.9% and then saw a subsequent 5.2% recovery.
While spot iron ore prices have plunged recently, RBC expects steel activity in China to remain subdued into the middle of 2009. As a result, it sees contract prices falling 10% next year.
For uranium, the global economic crisis likely lead to the selling of much of the material held by speculators like hedge funds, bringing spot prices down even further. RBC analysts believe the current price is too low to encourage sufficient new mine development and has cut speculative potential supply from its forecast. This has produced forecasts for balanced markets from 2009 to 2011, followed by two years of surplus. Strong deficits are expected a few years after that.
Jonathan Ratner
