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Investors have been jumping ship from base metals in recent months, almost universally in favour of equities, according to Edward Meir, an analyst at INTL FCStone.
Meir, who placed second overall for his base metals price predictions in Metal Bulletin’s first-quarter 2013 Apex contest, added that the first three months of the year were plagued by price falls across the commodities space.
“Investors are like lemmings. They’ll chase whatever’s hot, and they’ve been getting out of commodities and into the stock markets in their droves,” Meir said.
“In the second half of the year, I think [base metals will see] one more retest of the lows, probably over the summer months, then possibly the third and fourth quarter will look a bit better,” he added.
The year so far has been dominated by lower prices, Meir said, and although there may be some improvement, the rest of 2013 is still likely to see continued pressure on the base metals complex because of the macroeconomic picture.
“The growth story is very patchy. We’re starting to see the USA doing well, but China is clearly decelerating, and things in Europe are getting worse,” he said.
“Japan still hasn’t taken off, although it is trying to with its policy of weakening its currency deliberately,” he added.
The commodity sector, Meir said, has been suffering as a result of this poor global outlook, as well as from lacklustre demand.
There has been little compensation for this on the supply side, he added, as producers are not adjusting their output in line with the decrease in demand.
“Aluminium, copper, zinc – all of them are in surplus. [Some companies] have cut back, but it’s not enough,” Meir said.
“We’re seeing that manifest itself through increasing inventories – that’s what happened in the first quarter, and it’s more of the same in the second.”
The trigger for the collapse in prices was the major sell-off in gold, according to Meir, which “unhinged” a lot of commodities.
“There was a decent bounce last week, but that was more to do with short covering than a technical bounce, I think,” he said.
In recent weeks, he added, the numbers coming out of the USA have been poorer in general, and other key metrics, such as purchasing managers’ indices, goods orders and consumer confidence readings, have also looked uninspiring.
“We’ve slowed down in the second quarter every year going back three years – every spring [in the west], we seem to have a kind of comedown,” Meir said.
“This quarter, though, we’re not looking at big moves in either direction. The basic trajectory was lower over last month, and then a bit of an uptick.”
The variables in the market will remain roughly the same, according to Meir, such as the durability of any US recovery and the depth of the Chinese slowdown.
“If [the Chinese government] does not do more to bring down house prices, that will mean more of a contraction and less metals demand,” he said.
“We are still seeing surplus in all six base metals. Tin was the lone hold-out still in deficit, but even that is suspect.”
The key, he said, will be the imposition of sharper production cutbacks, but whether these will emerge remains to be seen. For all Apex results, click here.
Claire Hack chack@metalbulletin.com Twitter: @clairehack_mb