Font Size: Decrease Increase Print Page: Print Elisabeth Behrmann, Dow Jones Newswires | January 19, 2008
SPREADING credit woes and bearish economic data have wiped tens of billions of dollars off global stock markets since the start of the year, intensifying fears that the US may already be in a recession, but analysts say base metals will withstand the pressure from a slowing global economy.
China's economy is sufficiently decoupled from the US to keep metal demand growth buoyant in the medium to longer term, according to analysts, with Goldman Sachs leaving its commodity forecasts unchanged despite forecasting a recession in the US.
"There won't be much impact on metal demand growth. China is the primary driver for metal demand, while we accept that its economy isn't completely decoupled from the US," said analyst Tom Price at Merrill Lynch.
China consumes two to four times more metal than the US and makes up between 75 per cent and 100 per cent of demand growth for many commodities, according to the bank.
Base metals haven't escaped the turmoil in financial markets this week, as poor consumer spending data and record quarterly losses for Citigroup and Merrill Lynch battered investor confidence, sending equities to multi-month lows.
The London Metal Exchange bellwether copper contract plunged as much as 6 per cent below the $US7000 a tonne mark.
But this proved short-lived, and buying interest in Asia helped LME copper bounce back to about $US7080 a tonne amid reports of fresh fund money moving into the market, taking advantage of lower prices in an asset class that is relatively insulated from credit woes and offers portfolio diversification.
"The outlook for China's economy is robust," said Citigroup analyst Alan Heap.
"And while Beijing would like to trim growth to stop the economy from overheating, there is no undue concern for metals as China will continue with its infrastructure program."
Tighter credit conditions could hurt demand for metals, but the Government's efforts so far have had limited success, say analysts.
In a bid to rein in inflation, China recently reduced import tariffs on metals and oil and levied export tariffs on agricultural commodities, which should support domestic demand growth and restocking.
Copper imports for December bolstered this view, rising 0.6 per cent from the previous month but surging 78.1 per cent year on year, on strong economic growth and restocking by Chinese firms.
"China's latest numbers were reasonably strong and confirmed our forecast of $US3.50 a pound ($US7714/tonne) for 2008," Mr Heap said.
The US itself will avoid a recession, many forecasters aside from Goldman Sachs still believe, as a result of the Federal Reserve's aggressive interest rate cuts and chairman Ben Bernanke's reiterating a commitment to make "substantive" rate cuts if needed.
There is also the view that bearish news for metal consumption in the US cannot get much worse after the steep declines during 2006 and 2007, when new housing starts fell substantially and manufacturing activity slowed.
This should limit the risk for another sharp fall in consumption, Mr Heap said.
However, not everyone plays to the same tune. MF Global analyst Edward Meir believes China cannot escape a slowdown in the US economy that remains seven times larger than that of China, generating $US9.5 trillion ($10.8trillion) in consumer spending compared with $US1trillion.
And while copper can largely ignore a US slowdown, aluminium should face more of a struggle. The US makes up 12 per cent of global copper demand, rising to 18 per cent for aluminium, and a substantial part ofChina's aluminium semi-manufactured output is destined for export.
But despite a "less than inspiring global macro backdrop", base metal supply increases would not match an expected rebound in demand during the second half of the year, when lower interest rates filtered through, setting base metals on a path of recovery, said Mr Meir.
GBG Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
