The Goldman Sachs industrial metals index is down by 25% this year, and there is scope for further falls. “The outlook for… metals consumption has deteriorated significantly,” says JP Morgan’s Colin Fenton.
Europe is sliding into recession, and China, which accounts for 33%-50% of demand for various metals, is slowing down. Spearheading the decline are property and infrastructure, which are key sectors: the property market comprises a third of China’s steel and aluminium demand.
No doubt China will resort to some form of stimulus, says Capital Economics, but the likelihood is that this will merely limit the downside. Over the last decade, metals have needed Chinese growth of more than 10% to rise. That seems a stretch at present.
Another headwind for raw materials is a stronger dollar, a likely result of mounting risk aversion next year. Capital Economics sees copper falling by up to 15% to $6,000 a tonne by late 2012. Morgan Stanley is also very bearish on zinc and lead, given high supplies.