It turns out China’s stimulus package might not be able to save the world after all. Their mass hoarding of metals has certainly created a bump in the economy and metals prices, but I doubt it will go towards helping out the global inventory glut. Moody’s warns that base metals companies will be further hindered by a weak recovery, higher costs, and slowing demand.
“Our outlook for aluminum, nickel and zinc is weaker than our outlook for copper, but all metals will be challenged over the next twelve to eighteen months.”
This is consistent with what we’ve been hearing from most metals companies. Nucor and U.S. steel are the farthest thing from calling a bottom in the economy, yet copper prices soar. This is also consistent with the idea that we have expressed on several occasions: China’s stimulus package is producing some false dawns in the market. What looks like the beginning of a real economic recovery is in fact a huge boost in purchases from one country who is loading the boat in case of future price hikes. Moody’s went on to point out several reasons for the likely weakness:
- Global demand for base metals has collapsed, with no sign of improvement visible today
- Production cuts have proved insufficient to offset weak demand
- Metal prices will continue to exhibit volatility
- Cost side relief is becoming evident
- Benefits from economic stimulus programs will likely be mixed