Isra-Mart srl: Metals prices get the shakes

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Meantime, after a horror night in Europe - the German equities market down 5.28 per cent, the others not much better - and with the Dow futures (at 7am Sydney time) off by more than 200, there’s not much solace outside gold right now - and thermal coal (as we explain in a moment).

On the London Metals Exchange, there was no joy with the entire complex in the red, nickel having the biggest fall, being off 2.8 per cent to $US20,895/tonne. And we had the bellwether metal, copper, subsiding below the critical $US9000/tonne level.

Citigroup analysts say global economic prospects are worsening markedly. They have made sharp cuts to US, euro zone and UK growth, and have also shaved more modest margins off their China and India outlooks.
There is good news: Citigroup says that, with emerging markets driving demand for bulk commodities such as coal and iron ore, they expect those to weather any downturn in the developed world. Their first preference is thermal coal - which is out of line with much thinking here (but always favoured as a safe haven by your correspondent on the grounds that while cash-short consumers may stop eating out and buying designer outfits, they will always keep their air-conditioning and television sets in use).

In fact, the analysts say they see significant upside to thermal coal prices over the coming years on the back of an expected rise in thermal coal’s share of electricity generating capacity around the world - notwithstanding Canberra's plan to punish the industry here.

The Japanese have just recommissioned a mothballed coal-fired power station to replace supply from its shuttered nuclear plants. Both India and China will be importing more - India because it can’t supply enough domestically, China because countries like Australia can produce higher quality coals more economically.

Citigroup expects coking coal prices to also remain strong, while the iron ore market will remain tight until 2014 and then move into surplus as a raft of new projects hit the market (many of them small players in Australia against the big projects being developed in West Africa).

But the base metals don’t look so flash, according to the report.

The global economic outlook is bad enough for nickel, but surging Chinese production of nickel-pig-iron has stolen market share from refined nickel.

Copper's saving grace is the tight market situation despite the deteriorating economic outlook. "China remains the key," they add. In that country, inventories have been run down and consumers are using bouts of weakness to re-stock. However, mine supply will improve and the global economy worsen, so Citigroup has downgraded its outlook for an average $US9413/tonne over 2011 and $US8646/tonne in 2012.

Zinc remains the least favoured of the major metals. Surpluses are expected in 2011 and 2012 but further out - that is, 2014 - growth in mine supply is unlikely to keep up with ongoing strong growth in demand and prices may be able to recover.

On the other hand, Citigroup maintains a positive view on aluminium and expects prices to be sustained around $US2300/tonne. Below that level, a significant number of producers will begin to make losses and then production cuts could be made.