London, 7 January 2012

For now, base metals demand is defying market concerns of an 08/09-esq collapse, say Barclays Capital. Certainly, demand growth has weakened and in some regions it is contracting, but on a global level, base metals consumption is not demonstrating the disturbing pattern of torrential contraction that many in the market had feared.

Indeed, for every metal apart from zinc trend consumption growth is yet to even turn negative, and for metals like aluminium and copper demand levels are only moderately below the record highs. "It would appear that for now at least, the deterioration in market sentiment has overshot the deterioration in demand," according to BarCap.

"But that is not to say we are out of the woods yet and on our merry way back to recovery. European demand has been weakening fast and will probably continue to contract through H1 12 at least. But the decline so far has been relatively mild, especially compared with 08/09, and with the exception of aluminium, has not come hand in hand with a build in regional stocks.

"European LME inventories have actually declined over the past month or so, and this has occurred during a period which is typically seasonally weak for demand. The pathway is not clear yet and a number of risks remain, but recent signals from forward-looking economic indicators suggest that Q4 11 likely marked the nadir for metals demand."

In particular, BarCap point to their economist’s aggregate of manufacturing PMI data for December, which experienced the best improvement since January 2011, which bodes well for future demand conditions.

"Our economists look for global activity to stabilise early this year and for this to translate into a sequential recovery beginning in Q2. But we do not expect the kind of recovery staged back in 09/10 as there are significant headwinds to medium-term growth prospects and European troubles will take some time to address. Whilst we would caution against reading too much into December’s PMI data, even a stabilisation in activity conditions would mark an improvement from Q4. With this in mind, we believe that the likelihood of a large downwards move in base metals prices has diminished."

Ends --

Commodities Now