Base metals rally is vulnerable
Apr 17, 2009
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Base metals have been "far and away" the best-performing commodity sub-sector this year, says Barclays Capital, with the S&P GSCI Industrial Metals index up an impressive 15%. Copper has reached a six-month high around $4,500 a tonne.
But the rally looks vulnerable: the sector has raced "ahead of itself" and fundamentals still look "fragile". There's no sign of a significant jump in underlying demand, says Deutsche Bank. OECD economies remain weak and it seems China is merely stockpiling: copper demand there is not tracking the industrial production growth as it normally does.
But aluminium may be even more vulnerable. Rising prices are encouraging a restart in production even though demand is still falling; US producer Alcoa warned this week that global demand will slump 7% this year. The supply overhang is considerable, says Deutsche, and global production fell by just 6.1% year-on-year in the first two months of 2009.
With China restarting production as part of its stimulus programme, the surplus will continue to build, creating the risk of "a significant pullback in prices" from $1,500 a tonne towards $1,000 a tonne, says Barclays Capital.
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