Industrial metals - price hiatus ahead
According to the Royal Bank of Scotland, September and October could well be poor months for non-precious metals miners.in a report titled, "Diversified Metals & Mining: Q4 2010 Commodity Price Revisions & Outlook," the bank writes, year-to-date share price movements point to the fact that the world has moved into what it terms the "second phase" of the mining cycle, which is characterized by volatile but largely sideways movement for mining equities.It notes that while phase one of the cycle, which they posit began in December of 2008, sees mining stocks rally on the back of improvements in "liquidity and the resulting balance sheet relief, the turn in global economic leading indicators, weakness in the U.S. dollar, commodity purchases by China, the resulting drawdown in exchange inventories and the increase in commodity prices", it is not a sustainable uptick." The optimism toward mining asset prices generated by the turn in leading indicators and the resumption in economic and commodity demand growth eventually gives way to the reality of lagging fundamentals as economic growth slows. The shares give up some or all of their gains and move into a broad sideways trading range until industry fundamentals catch up," RBS analysts write. In order to move through this volatile second phase and into the third phase where "mining shares are driven to their cycle highs as commodity prices and earnings increase dramatically" the significant excess capacity and inventories that exist in most metals markets need to be eliminated.But, the report says, "Whether the second phase of the cycle that we have entered will turn out to be a brief period of consolidation (copper?), a significant correction (nickel?), a long period of stagnant prices (aluminium?) or some combination of all three will largely depend on the strength of commodity demand and the underlying levels of capacity utilization and excess inventories."The report adds, "Leading indicators point to a slowing in global demand growth over the next 6 to 12 months The dramatic turn in the OECD leading indicators was the prime catalyst for the rally in commodity and mining share prices in 2009, and the peak in the leading indicators corresponded to the correction and transition into phase two of the cycle."If one looks at things on a 12-month rate of change basis, RBS says, it is clear that the rate of growth in demand has begun to slow.Adding that, while physical premiums, which are the premiums consumers must pay over LME prices to receive physical delivery of metal at specified locations, show evidence of improved demand outside of China, they have begun to decline recently. A fact, the report says, points to "the prospect for weaker demand in the second half of 2010 as China slows and restocking in the developing world comes to an end.""The industry continues to suffer from significant excess capacity, except for copper,vIn the wake of the global financial crisis and recession, capacity utilization rates fell to the lowest levels we have seen since the early 1980s, and we believe that it will take some time for utilization to rebound to levels that will support sustained high prices once again."