A new report from Moody’s Investors Service says demand and price expectations for the global base metals industry will remain muted across all end markets during the next 12-18 months as macroeconomic factors challenge the industry’s ability to move out of its present lacklustre state.
Moody’s vice president Carol Cowan says the outlook for the global base metals industry - mainly producers of aluminium, copper, nickel and zinc - remains negative. “Recession in Europe, sluggish economic growth and anxiety about the fiscal cliff in the US, and slower growth in China are all weighing on the industry in the New Year. The base metals industry faces a challenging road in 2013. China is a key driver of metal consumption and its appetite for metals remains the wild card in the direction of metal prices in 2013.”
Carol Cowan says market conditions and prices haven’t rebounded from their strong levels last year and prices remain volatile, with risk to the downside. “Demand and prices for base metals are directly correlated with global industrial production, since base metals are an integral ingredient across all industries.”
The report also highlights financing transactions for nickel and aluminium will continue to mask weak underlying supply/demand fundamentals in the near term, particularly for aluminium producers including Alcoa, Norsk Hydro and Noranda.
Copper is best positioned among base metals due to its more favourable supply/demand characteristics, to the benefit of companies such as Southern Copper and Freeport-McMoRan Copper & Gold.
However, Moody’s outlook indicates despite the weak metal prices, costs will not fall enough this year to allow producers to maintain 2012 margins and profitability.
“Energy, fuel and labor will continue to account for a significant portion of overall costs,” Carol Cowan says. “There is a limit to how much these costs can be reduced, notwithstanding efforts to control them.”
The report indicates prospects for the base metals industry could meaningfully improve if the world’s largest economies institute economic stimulus programs, while uncertainty over the European debt crisis diminishes and growth in China picks up again.