Continued Deterioration in Metals Demand 'All Too Clear'óBarclays


"Barclays Capital Commodities Research analysts forecast a 'dire near-term outlook for the global economy and metals demand.'"

In Barclays' recent Metals magnifier report, the analysts noted, "Over the past few weeks, the macro outlook has worsened further, and there is not even a glimpse of bottoming in key macro specific indicators."

Meanwhile, market surpluses are building fast with aluminum and nickel inventories at 10-year highs, while copper, lead and tin stocks remain well below the peak of the previous cyclical downturn. "Although production cuts have been quick to emerge, for most metals, production needs to be pared back further, so prices may yet need to trade deeper into cost curves."

The good news is that metal production cuts are still rapidly mounting. "The volume of production cuts in response to low prices is substantial, and the speed at which cuts have been made have been encouraging," the analysts said. "Further, for many metals, mine cutbacks are being met with smelter cutbacks, which we believe is an encouraging development that highlights producer production constraintóa characteristic that has so often been missing, leading to the large metal surpluses of the past."

Barclays suggested smelter responsiveness to low prices will prevent huge metal market surpluses from forming during the current economic downturn. They also believe "copper and zinc prices will be the quickest to recover."

The analyst found that aluminum consumption "has deteriorated at a startling pace and the evidence is mounting to suggest that any recovery is a long way off. We believe global consumption is now declining."

Given the potential for more aluminum stock increases, Barclays anticipates a further downside to aluminum prices over the coming months, "though with 60% of the industry currently operating at a loss, the scope for further big price declines is limited, in our view."

Meanwhile, while supply problems are positive for the copper market, the analysts declared that "the demand outlook is very poor indeed, and we expect inventory levels to continue to grow substantially in Q1, which were forecast to the trough for quarterly average LME prices at $2,900/t. However, they added, "a strong recovery in prices is likely in late Q2."

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