Metals – banks say invest with confidence through 2011

Greetings investors!

I’m fixated on metals prices for the foreseeable future, though I’ve never had so much trouble seeing beyond the next 120 days in my life! Nevertheless, banks are suggesting ‘moderate’ support for the next few quarters owing to continued consumption and demand for commodities as an investment.

The World Bank is projecting economic growth to hit 6% in emerging countries and slightly above 2% in developed economies. Apparently monetary and fiscal policies are working better in developing nations because they aren’t suffering from impaired balance sheets. As these countries continue to build, the industrialized nations will continue to mine and manufacture metals.

It’s interesting now to note the World Bank’s hindsight take on the financial crises. I’ve been glued to the bank’s pronouncements since September of ’08 because nobody else had the data set required to get a really accurate view of what was going on regionally and across the world. And it’s no less fascinating today. Eighteen months after the chips fell, the World Bank notes that commodity prices were already falling before the onset of the acute phase of the crisis. However, it notes that “… between July 2008 and February 2009, the U.S. dollar price of energy plummeted by two-thirds, and that of metals dropped by more than 50 percent, from earlier highs. Dollar prices of agricultural goods retreated by more than 30 percent, with the prices of fats and oils dropping 42 percent.’

Now that’s what I call a plunge in pricing! However, the subsequent process of righting the boat was very odd and I suspect rather inequitable, thus: ”Dollar prices of energy and metals com­modities began to recover in March 2009, broadly in tandem with global economic activity. The price increases partly reflect the depreciation of the dollar that has since re­versed almost all of the appreciation that was associated with the immediate flight of capital from the rest of the world to the United States. Indeed, the real local-currency price of inter­national commodities (a measure that corrects for currency fluctuations and inflation differ­entials) increased much less than dollar prices. For instance, although energy prices measured in U.S. dollars rose 57 percent between February and October 2009, the in­crease over the same period in trade-weighted real local-currency terms was only 33 percent.’

That’s pretty good arbitrage, I’d say. Ring the cash register, boys!

Back to commodities. Oil? Decreasing demand in 2010. “ World oil demand, which grew on average by 1.7 percent a year over the 2000-2007 period, declined by nearly 3 percent during the last quarter of 2008 and the first quarter of 2009—a result of reduced economic activity and induced conservation and substitution toward other en­ergy sources in response to high oil prices. Oil demand in OECD countries began declining in the fourth quarter of 2005 (when oil prices surged above $50 a barrel) and has been fall­ing for more than four years now, with little or no growth expected in 2010. Demand in non-OECD countries also declined in the first quarter of 2009, but has since increased and is projected to resume its trend growth rate in 2010…

Aha, there’s that infrastructure build-out in the third world we’ve been hearing about. Pricing power will remain in the hands of OPEC, according to the world’s bankers: “Unless significant additional reserves are discovered over the longer term, OPEC's pricing power will continue to increase. Ulti­mately, however, alternative energy sources such as coal, natural gas, nuclear power, and various renewables are likely to prevent real oil prices from rising without end. Industry estimates suggest that at current real oil prices, demand and supply should remain in balance for the foreseeable future.”

On the financial front, Societe General notes in its much anticipated forecast that we are looking at “binary inflation” in 2010. Large output gaps persist in the developed economies, which should keep inflation well contained in 2010 and 2011, while there are mounting inflation risks in the emerging economies. A debate over the medium term inflation outlook is beginning "to flare", however, and SocGen is of the view that inflation is very likely to be the next hurdle to overcome.

That should drive precious metals demand nicely, says the bank. PGMs meantime will fall back though platinum has some further upside scope. Lead will benefit from a rebound in auto sales, zinc will be constrained by a surplus, nickel should benefit from a predicted increase in stainless steel production, while aluminum and copper are looking good from the recent smelter restarts and greater global demand.

As for the popular fear of China ‘melting down’ as a result of floating their currency, SoGen says that such a revaluation is more likely to support commodities then impede Chinese exports – and that any knee-jerk drop in prices in response to such a revaluation would offer a buying opportunity