The U.S. Federal Reserve reversed course in
September and eased monetary policy, cutting the federal funds
rate to 4.75 percent from 5.25 percent. Historically, the funds
rate and metal prices have been positively correlated, largely
because rising interest rates went hand-in-hand with a strong
economic performance (and hence metals demand), while an easing
in monetary policy usually took place in the environment of a
decelerating U.S. economy.
In my view, the current macroeconomic picture
in the United States is certainly not bullish and the
fundamentals are now not as strong as they were before the
However, there are some factors that should
mitigate the impact of the deceleration in North America, so
metal prices are likely to remain relatively well supported
from the demand side (for many metals, supply additions are
still not massive).
Importantly, the share of U.S. gross domestic
product (GDP) in the global economy has been declining over the
past few years as other countries, especially in the developing
world, have gained in importance. The decreased weighting of
the United States is also reflected in the fact that over the
past few years world industrial production has outperformed
U.S. manufacturing activity after being a laggard for a long
time (which is also one reason why the London Metal Exchange
price index has risen well above the levels seen historically).
This is heavily influenced by the strong growth of many
less-developed countries, especially China, whose industrial
activity continues to expand at a rapid pace.
My generally strong fundamental view on most
base metals has not changed following the cut in U.S. interest
rates. Although it is likely that investor sentiment will
remain a crucial factor on the financial markets, metal prices
should once again move more in line with what physical demand/
As for individual metals, the nickel market
likely will be focused on the stainless sector, where many
producers had cut output earlier this year, partly because
distributors were de-stocking. The consequent decline in nickel
demand has been reflected in the monthly supply and demand
balances, with the International Nickel Study Group reporting a
sizeable surplus year to date.
Underlying stainless demand is still strong
but actual new steel orders will be heavily influenced by steel
prices, for which nickel quotations are an important factor.
The European alloy surcharge fell by $630 per tonne in October,
which fed straight through into stainless transaction prices.
October surcharges posted by major U.S. stainless producers on
Type 304 sheet fell by about 26.4 cents a pound from September
and are down about $1 since their high point in July.
After nickel prices declined sharply earlier
this year, they have been relatively steady of late, which
means that the scope for further large decreases in alloy
surcharges, and hence stainless prices, is likely to be
limited. This should give stainless buyers an incentive to
place new orders.
The copper market is concentrating on China,
where metal users have drawn down some of the inventories built
up, especially in the first half of 2007, and any sign of a
return of buyers and imports will lend support to copper
prices. The negotiations on treatment and refining charges
(TC/RCs) also should be interesting (they usually begin during
LME Week in October). I forecast a very tight concentrates
market in 2008 (and low TC/RCs), which should make it
economically difficult for many smelters to operate.
Michael Widmer is head of metals research
at Calyon Financial SNC.