LME – Unsettling signals

LME - Unsettling signals

Commodities and precious metals have continued to lose momentum as a stronger US dollar slashed demand for gold as a safe haven asset and amid concerns over slower growth in China, where third-quarter GDP was the weakest in the past two years.

Analysts say prices of a raft of commodities and metals would come under pressure for at least the next two weeks.

In the short-term, energy prices “face pressure from technical factors, disappointing German economic data and weaker Chinese GDP,” Tom Pawlicki, precious metals and energy analyst at MF Global wrote in a recent report. China is the world’s second largest oil consumer.

Hussein Allidina, head of commodity research at Morgan Stanley, also warns that demand for crude oil would drop in the first half this year as the European debt crisis is far from being settled, and which will hurt Brent prices.

The fundamental outlook for crude remains challenging over the next six to eight months, Allidina says in a report.

Castor Pang Wai-sun, Core-Pacific Yamaichi head of research, said oil prices are unlikely to drop below US$75 (HK$583) a barrel. “When prices drop too much, Saudi Arabia will cut supply to maintain prices.”

Philippe de Lavalette, director of equity division at AXA Investment Managers, Paris, expects oil to hover between US$75 and US$95 a barrel in the next six months.

Gold had a volatile week. It stood at US$1,670.85 per ounce on October 17. On October 20, it slipped below US$1,620, Investors sold bullion to cover losses in equity markets, said Sun Yonggang, an analyst at Shanghai- based Everbright Futures. On October 21, the precious metal started climbing once more, closing at (HK$1,642) per ounce.

But analysts are positive on gold as a hedge against inflation.

“Gold has the weakest link to fundamental factors, and its price decline is quite limited,” Bank of Communications chief economist and strategist Law Ka-chung said, adding global inflationary pressures are still strong, which will continue to help boost gold prices.

Prices could reach US$2,100 per ounce next year, depending on the monetary policy stance of US and European governments.

David Mann, regional head of research for the Americas at Standard Chartered, expects the Federal Reserve to launch a third round of quantitative easing within March next year.

BlackRock (Hong Kong) said gold equities are currently trading at attractive valuations relative to bullion prices. “We believe that the sector’s earnings for the third quarter will show decent quarter-on-quarter and year-on-year increases with the potential for higher dividends,” the asset management firm said in its weekly report. But it warned that real interest rates would be key to the gold market, as the opportunity cost of holding gold could rise. For basic metals however, the outlook is less optimistic.

“Investors of metals should be cautious as resources are closely linked to the real economy, especially China,” Helen Wang, head of basic metals for Greater China at MF Global said.

Rio Tinto, the world’s second- largest iron ore miner and a top producer of copper and aluminum, has warned that some customers are requesting shipment delays.

China, which absorbs about 40 percent of the world’s copper, revealed for the first time that its inventory was at 1.9 million tonnes as of end 2010, compared with market estimates of 1.5 million tonnes.

This led to speculation that China’s copper imports would slow down, although inward shipments hit a 16-month high in September.

“The [copper] demand will shrink, when the production of China’s home appliances and electrical wire and cable slow down,” said Core-Pacific Yamaichi’s Pang.

Global economic woes are weighing on steel prices as well.

“Renewed economic concerns in the euro zone have led to market participants adopting a `wait and see’ approach in the third quarter. This contributed to steel prices contracting by between 10 percent and 20 percent over the past quarter since end-June,” Fitch Ratings wrote.

Roelof Steenekamp, a director on the European industrials team at Fitch said the outlook for steel demand in developed countries is weak in the short- term, due to challenging conditions in construction, automotive and manufacturing sectors.Some expect weak demand in the west to be partially offset by demand in China and other emerging markets.

But crude steel output in China, the world’s biggest producer, dropped to the lowest in seven months in September after prices fell to a 10-month low.

This caused prices of raw material, including iron ore to decline to the lowest in almost a year. BHP Billiton, Rio Tinto and Vale (6210), the leading miners who influence iron ore prices are said to have brought down fourth- quarter prices to US$160 per tonne from the contract price of US$175 per tonne.

It has been estimated that the price adjustment could result in US$500 million in savings for Chinese steelmakers, which import 50 million tonnes of iron ore per month.

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