The demand for base metals in the new year takes a hit as the current Asian financial contagion spreads around the globe. However, the scenario today is less gloomy than previously anticipated.
Concern over the impact of a financial meltdown in the Asian tiger economies, and anaemic economic activity in Japan, is serving to undermine the prices of most industrial raw materials. Merrill Lynch envisages a generally weak base metals market in 1998, largely due to this growth slow-down across Asia.
It would be false therefore to present a bullish scenario for demand and prices of base metals, amid signs of probable deflation spreading among the major metal-consuming countries. Although the first half of 1997 was seen as the beginning of a bull market in base metals, faltering growth in Asia has dampened the outlook during the second half, and this is reflected in the declining physical metal premiums on the London Metal Exchange (LME).
Since the mid-1960s, the Asian region, including Japan and China, has remained a dominant force in the production and consumption of base metals. Before its recent currency turmoils, it was estimated that between 1995 and 2005, a massive $3tr would be spent on infrastructural projects in Asia, hence boosting demand for construction materials.
Recent price weakness, however, reflects the deterioration in supply and demand fundamentals, and also the impact of the hedging mechanism. Investment funds have been selling future contracts heavily on the LME, in order to recoup losses sustained on the global stock markets since late October. Despite this, analysts say that funds might yet increase their weighting later this year, especially in aluminium, zinc, and nickel, where fundamentals are looking positive. Total commercial base metal stocks are presently significantly lower than they were at the end of 1993. Thus analysts believe that metals are strategically placed to generate positive returns on such investments over a period of time.
Towards the end of 1997, a number of leading institutions, including the Standard Bank of South Africa, Merrill Lynch, Rudolf Wolff, HSBC James Capel, Billiton Metals, the Economist Intelligence Unit, and Metal Bulletin Research produced a comprehensive analysis on the outlook for base metals.
In summary, analysts see a manageable medium-term downturn in the copper market. A substantial expansion in mine and refining capacity, and a slow-down in industrial output in countries like...