The Hindu Business Line : Demand for steel, metals may recover by year-end

Mumbai, Aug. 13 The latest composite leading indicators of OECD while signalling continued positive outlook for major global economies suggest that moderate economic expansion will continue in the OECD area. Performance of all major economies has shown improvement.

The latest data for OECD non-member economies points to continued steady expansion in China and India, and an improved outlook for Brazil and Russia.

What do these data mean for the world metals market? For those with a cynical view of the marketplace, reinforced by recent financial market panic, the latest economic indicators may bring new insights.

Primarily, positive economic performance points to demand recovery, not demand collapse.

There is a strong positive correlation between economic growth and metals consumption.

The apprehensions over a so-called imminent US recession may be unfounded if one went by the latest data.

Forward indicator

The OECD lead indicators are a reasonably accurate forward indicator of industrial production, and by implication steel and base metals demand.

There is optimism over recovery in steel and base metals demand towards the end of 2007, even in the US because of the notable strength of the US indicator.

Given the recent weakness in US steel and base metals demand, there is likelihood of a good recovery (not collapse) in metals and steel demand before the end of 2007, Macquarie Research Commodities said in a recent report.

Interestingly, the US has experienced a downturn in steel and metals demand during the first half of 2007, averaging around 10 per cent year-on-year.

This has been due to a mixture of weaker demand in end-use sectors (especially housing) and heavy inventory de-stocking. The US and non-Chinese demand as a whole looks set to recover towards the end of the year, Macquarie pointed out. Strong growth in infrastructure in many developing countries continues to support the metals market.

The risk of a US slowdown notwithstanding, booming domestic demand in major Asian economies (China and India) will be a supporting factor.

Steel outlook

The steel industry outlook is positive. World steel demand outside China (mainly in India, Eastern Europe, the former Soviet Union and West Asia ) is booming and double-digit growth rate is expected to continue in these areas, leading to tighter demand/supply conditions.

Forecasts on metals

Within base metals, copper continues to enjoy favour. Aluminium too seems to attract renewed attention. Both copper and aluminium price forecasts have been revised upwards by Macquarie.

2008 copper price forecast is raised from $3.25 a pound to $3.50/lb. For 2010 and 2011 forecasts, a 25 per cent upgrade has been made. 2008 and 2009 aluminium price forecasts are up by 13.6 per cent and 18.2 per cent, respectively, to $1.25/lb and $1.30/lb.

There is less optimism about nickel and zinc, relative to their recent highs; but still strong prices are expected to be maintained.

Zinc price forecasts for 2010 and 2011 have been revised upwards to reflect a tighter medium-term supply/demand outlook.

In zinc and nickel, a greater downside risk is perceived, while copper and aluminium have upside risk.

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