Banks See Metals Prices Retreat This Year


". . .China will become the main source of event risk for commodity markets"

Our favorite doomsayer Ambrose Evans-Pritchard of The Telegraph quotes research from Deutsche Bank and RBS in a recent article Michael Lewis, commodities chief at Deutsche Bank as says, "We believe overheating risks in China are escalating, heading into the second quarter, we believe China will become the main source of event risk for commodity markets, specifically industrial metals."

The bank believes Beijing is likely to slash growth in spending on infrastructure from 120% last year to just 7% this year. Deutsche expects China's central bank to cut loan quotas by almost a quarter to 7.5 trillion Yuan ($1.1 trillion) this year, raise rates, and tighten reserve rules to choke inflation, while local authorities take their own measures to curb the property boom. As lead, zinc, copper, and nickel are all highly leveraged to China's building cycle, consumption will be hit dramatically if investment is cut back as expected.

RBS is in broad agreement saying China has been the main engine of metals price increases sucking in up to 40% of the world's consumption but more controversially it claims much of the buying was speculative and large inventory-position risk still exists that hasn't been touched despite industrial activity.

RBS is expecting prices to fall back over Q2 and Q3, not collapse but retrench as final consumption fails to continue its heady growth of H209. The bank also warned that a surge of pent-up supply from mines is "waiting in the wings to make its grand entrance" just at the wrong moment as the global recovery goes through a patch of turbulence.

RBS is most bearish on gold, forecasting a 17% drop to $925/oz. later this year. The metal will lose its 'anti-dollar' appeal as the dollar grinds higher and the Fed tightens, but shoot to fresh records above $1,300 by 2013.

But the greatest looming danger is a Sino-American showdown over the Yuan-USD exchange rate peg. As the article concludes, "Political rigidities appear to be building both within China to resist change, and within China's trading partner—prominently the U.S.—to try to force change. This is a toxic mix."

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