NEW YORK As the global economy recovers from the worst recession in 70 years, industrial metals are expected to stay on a recovery path this year, but metal producers warn that the advance may be slow as demand remains shaky.
Among the positives for demand are the impact of lean producer inventories, government stimulus programs and Chinese consumption, analysts said. Global economic growth is starting to pick up as a result.
"We're not expecting particularly strong growth in the world outside China, but we are forecasting global growth will move from a decline of 1 percent in 2009 to a gain of 3.7 percent in 2010. That's a strong inflection point," said BMO Capital Markets global commodity strategist Bart Melek.
He also sees global industrial production recovering from a 12.5 percent decline in 2009 to a 3.2 percent rise in 2010.
That all means more demand for everything from copper pipes, to aluminum for auto and aircraft production and zinc for galvanized steel.
This demand picture will be analyzed closely at the Reuters Global Mining and Steel Summit in New York, London, Sydney and some other major cities around the world this week.
Top executives of leading mining companies and owners of downstream operations such as smelters will discuss their outlook for the industry in 2010 and beyond.
The heads of gold, silver and palladium miners will also be in attendance after recording a strong performance in the past year.
Analysts said they continue to see investors using gold as a hedge to protect against political risk, sovereign debt issues and inflation.
Reuters Insider on gold's long-term technicals:
And, though metal industry executives agree the economy has improved, they also continue to report uncertain order levels from many sectors of the global economy.
"Business is still weak for us in the developed world, in the U.S., Japan and in Europe. But the long-term outlook is good," Richard Adkerson, CEO of Freeport-McMoRan (FCX.N), the second biggest copper producer, told investors last week.
"When you add in any recovery in the developed world with the opportunity in China and other developing countries, you get a positive outlook for demand in the long run," he added.
John Surma, U.S. Steel Corp (X.N) chief executive, said in a recent interview with Reuters: "In my view, the worst is probably behind us. The trajectory we're on is better, but there's some ways to go yet.
"We're moving in the right direction. But end-use demand? We're still very cautious about that."
At last year's Reuters summit, numerous chief executives talked about signs that they were skidding at the bottom. This year, the talk is how fast things will pick up.
Analyst Paul Cliff at Nomura in London is especially bullish on copper and bulk commodities such as iron ore.
"Since the beginning of the most recent copper price rally from the end of 2008, market sentiment toward copper has been negative in the short term, but almost universally bullish over the medium to long term. This suggests that any correction in copper is likely to be short-lived as buyers quickly return."
Also positive on copper, Barclays Capital's Christopher LaFemina in London said: "We see near-term upside risk to some base metals prices, due to potential inventory restocking in the OECD (Organization for Economic Cooperation and Development), demand strength in China, and supply constraints."
Metal prices have already climbed above last year's averages. For example, copper is currently trading around $3.40 per pound, much higher than the 2009 average at $2.34. Spot aluminum prices are running at 98 cents per pound and averaged 75 cents last year. And, U.S. Midwest hot-rolled coil steel was last priced at $625 per ton, well up from $500 a year ago.
Infrastructure building in China and other emerging economies should keep prices strong over the very long term.
"I think we're in a secular bull market for commodities and will be interrupted by speed bumps on occasion, which it's gone through in the last year and a half," said Wayne Atwell, Casimir Capital research director in New York. "But I think you could have a strong market for metals for the next 10 years,"
The recession has helped keep supply of most metals under control as mines, refineries, and mill capacity have all been cut. In many cases, exploration and development budgets were also trimmed, delaying any new supply entering the market.
Surma said U.S. domestic steelmaking capacity was just under 70 percent, "which is good, but not great." For the past 20 years the average was 85 percent capacity.
With double-digit growth rates forecast for China's economy for at least the next several years, analysts expect metals to be resilient in the long term.
Most reject talk from some hedge fund activists and bank strategists that China's real estate boom may end in a bust that drives down metals prices.
New York-based hedge fund manager James Chanos at Kynikos Associates told Reuters last week that some of the biggest suppliers of raw materials to China in Brazil, Australia and Canada could get hit if China's property bubble bursts, adding that it could take three or four years to play out.
Certainly, China has become a lot more import for metals markets in recent years. Atwell pointed to China's shift from 4 percent of global metal consumption 25 years ago to 28 percent to 45 percent now. In 2009, China consumed 46 percent of global steel.
"Basically, China is driving the bus. What you have are emerging markets China and India coming back dramatically and making up for what you haven't seen in the U.S., Europe and Japan," said Atwell.
But even in OECD economies, demand for metal has been returning. Inventory restocking, infrastructure rebuilding, and supply constraints -- from the recent earthquake in Chile to greater hurdles to developing new mines -- should all contribute to keeping prices bolstered.