Risk of ‘catastrophic event’ more remote: AME

By Paula Wallace

However, the risk of a “catastrophic event” has become more remote according to the industry analyst.
“As repeated in many articles and reports the market looks better this quarter and this is reflected by a change in our GDP and IP world numbers,” said the report, referring to the June quarter.
Of course, “better” is a relative expression and the contraction is simply supply slowing after the exceptional drop in the six months to March.
The financial system, while fairly stable, is vulnerable to a weakness in the real economy, said AME.
“This would be particularly true if a negative spiral occurred, in which householders and businesses were to expect that a sustained period of deflation was imminent.
“The US looks to hit bottom in the second half of this year, but an unemployment rate of 9.5 per cent and a new monthly number of 467,000 is a ‘damp squib’.”
Unemployment of more than 10 per cent must be expected, said AME. The firm reported the “Euro area looks opaque with chequered country data reflecting particular circumstances, with Spain being one of the worst with near-depression levels of unemployment at 18.1 per cent.”
Japan’s economy, driven by its poor trade-induced contraction, is also seeing the light thanks to fiscal stimulus, although slack capacity remains huge.
“It’s still an improvement on exports, falling at a 50 per cent annualised rate during the fourth quarter of 2008 and first quarter of 2009. An appreciation of the yen by 25 per cent has also contributed to this collapse and greatly reduced corporate profitability.”
The analyst has upgraded its copper price forecasts for 2009 and 2010 in spite of the fact that this year we will see a decline in overall copper demand of around 7 per cent.
AME has marginally increased its 2009 nickel cash price forecast as a “mathematical adjustment” and reflects the price rally of all base metals on the LME.
The recent proposed “merger of equals” between Anglo American and Xstrata could prove interesting for the already concentrated nickel industry.
Combined refined output for 2009 is estimated as 110kt. In 2013, it could reach 150kt in primary nickel. This would position the new company as the fourth largest refined nickel producer and fifth largest nickel miner in 2009.
AME’s forecast prices for 2010 for lead and zinc remain constant despite the price volatility observed over the last month. It has revised its 2009 remainder prices upwards but cautions on any further “exuberance”.
Based upon AME’s mine cost analysis, spot prices are beginning to reach levels that will encourage domestic iron ore production back online in China. Thus, import volumes will fall in the coming months; and steel prices and iron ore prices will move in tandem.
AME has revised its Chinese steel forecasts upwards, with steel production expected to increase by 2 per cent in 2009. Not only has actual steel output growth in 2009 become too strong to ignore, strong investment spending figures, regarded by AME as an excellent forward indicator of future steel demand, have also prompted this revision. At the end of May, Chinese investment in the construction and real estate (+13 per cent), manufacturing (+30 per cent) and transport (+61 per cent) sectors were all up strongly from last year. Meanwhile, steel production in the rest of the world will decrease by 23 per cent in 2009, driven by downgraded expectations for steel production for most of Europe and North America.