LONDON (Commodity Online): The dollar tumbled in September/October amid growing discussions on the future of the US currency's global role. We consider ourselves dollar bulls compared to most of the market but there's no denying there has been a shift in global perceptions recently. The dollar's decline looks set to continue while the US government's budget is apparently in considerable turmoil and destined to get worse, but a short-term reversal is surely likely at some point; metals prices (especially gold and silver) will react accordingly.
Gold
Gold hit a new all-time record in October as the dollar crumbled. The risk of a correction remains high but history shows it might have further to rise first.
Silver
Silver stormed higher in October as well, but has not outpaced gold as much as we expected given the normal relationship of these two metals.
Platinum
Platinum too is strong but its rally is perhaps running out of steam. The car market remains the key issue - as the various incentive schemes tail off - will sales collapse as in the US or merely subside as in Germany? Diesel's market share continues to slip in Europe, a worrying trend for platinum.
Palladium
China's car market saw sales of over 1m units in September for the first time, which is very supportive for palladium. Investors have taken note and the potential for a US ETF could add further fuel to the fire.
Aluminum
LME stocks have fallen steadily since mid-September, suggesting demand is beginning to pick up. But this may be a case of restocking rather than any real pick up in demand and we remain cautious on aluminum’s short-term prospects, such is the surplus of metal in the marketplace. Fortunately, for now the availability of immediate metal is tight, as much is locked in term financing deals or off-market. Should these ripples of demand turn into a flood then the price could spike over the next few months.
Copper
China likes to surprise and with unwrought copper and copper products imports increasing month-on-month in September, against consensus forecasts of decline, the copper rally received a welcome boost. OECD demand recovery is still crucial for the copper price to continue its march, but at least Chinese demand will cap declines.
Nickel
Nickel is in oversupply, like most base metals. But once stainless steel producers and other end users commence restocking we expect to see visible stocks decline significantly. However, this does not look probable in Q4 2009, and nickel's only support will come from cross commodities sentiment in the run up to Christmas.
Lead and zinc
Zinc is facing a large surplus in 2009 as producer discipline that was so smart to react to the onset of recession has overshot current demand levels. This will weigh on prices for the remainder of 2009. Lead will find support from replacement battery demand in the northern hemisphere winter and to smelter closures on continuing lead poisoning investigations in China. We are positive on both lead and zinc in 2010, and expect them to be two of the best performers along with copper.
Tin
Poor demand and growing supply would normally be negative for the tin price. But we expect it to remain range bound between $11,000/t-$15,000/t in Q4 2009. In early 2010 there could be some downside risk to the price until demand picks up from the electronics sector. One caveat to this is the swing factor of Indonesian supply.
Steel
The US investigation into the alleged 'dumping' of seamless steel pipes from China could spark a tit-for-tat exchange that might crimp economic recovery on both sides. We hope this will not be the case. China's steel sector has overproduced and needs to rid itself of large inventories. Any US action - alongside action already imposed by the EU - could keep prices lower for longer, and will not sit happily with Beijing should capacity be shut down and jobs lost.
Plastics
Start-ups in China and the Middle East have flooded the linear low-density polyethylene and polypropylene markets with excess stock, which will take months to work off. Capacity closures will need to be made to ensure there is a speedy recovery, and this will likely fall on higher cost producers in the EU and US.
