Standard Chartered Bank forecasts dark days for commodity demand

Standard Chartered Bank (SCB) says the demand picture for commodities....

Standard Chartered Bank (SCB) says the demand picture for commodities does not look supportive and it expects commodity prices to remain weak well into next year and subdued until the middle of 2009. However, secular demand growth for commodities remains intact in the longer term.The bank said in a research note that growth is slowing, not only in the OECD, but also in emerging markets, as the impact of the current financial sector crisis spread.Head of SCB’s Commodity Research Helen Henton said demand for commodities is already suffering, while the bank expected further weakness in demand. Commodity supply cutbacks would help in some cases, but overall there will still be downward pressure on prices."With GDP growth likely to remain weak well into next year, we expect prices to remain subdued until the middle of 2009. What we are seeing is a cyclical demand downturn," said Henton.Henton added that the bank had been highlighting the risks of slower global demand for some time, but the deterioration has been accelerated by the financial crisis.But she pointed out that, in the longer term, the story of secular demand growth for commodities remained intact due to the development of key economies such as China and India.The bank’s view on base metals was that metals demand from China - key to the base metals outlook - is not collapsing, but that the pace of growth has slowed.Chinese base metals consumption has already slowed considerably in the last few months due to a combination of a slowing global economy and government attempts to rein in inflation that "squeezed" manufacturers, said SCB.Demand conditions for base metals are likely to worsen in the months ahead, but supplies are also likely to be cut back on lower prices. It was important to note that headline figures overstated the weakness, as these were distorted by a huge inventory overhang."Once this has been worked through, demand growth will look healthier," said Henton.SCB said anecdotal evidence supported the view that copper consumption growth has slowed sharply. Fabricated copper production fell to 18% year-on-year in the year to July from 23%, due to weaker than expected demand from a few key "end-use" sectors including home appliance, air conditioner and refrigerator manufacturers.In 2007 apparent consumption growth was at 37%, but growth dropped to an average 4% in the first eight months of 2008. However these figures were distorted by the inventory cycle.SCB said it was not all bad news for copper as the expansion of the power sector was providing solid support to copper consumption and would prevent demand from sliding in absolute terms. This came as electrical use of copper still dominated or comprised 60% of total usage.Demand for platinum group metals (PGMs) was likely to weaken further, despite the fact that supply issues persist. This follows heavy falls in PGM prices with ongoing problems in the automotive sector adding to downward pressure.In contrast, gold is likely to remain well-supported near term by safe haven flows and falling interest rates. However, once financial conditions stabilise, some of the safe-haven flows would disappear and together with US dollar strength, bring prices lower.But in the longer term, SCB retains its bullish outlook on "structural" US dollar weakness.