Europe's economic rebound to boost industrial metals demand

Wed Sep 18, 2013 9:31am EDT

Related Topics

* Europe is world's 2nd biggest consumer of base metals

* Pent-up demand expected after euro zone exits recession

* Buying from Europe could tip market balance in some metals

By Eric Onstad

LONDON, Sept 18 (Reuters) - Increased demand in Europe as it recovers from recession could tip the market balance for some industrial metals, creating small but price-boosting deficits after years of surplus.

Europe's rebound, while expected to be gradual, may surprise investors used to ignoring the continent in favour of China, the world's biggest consumer of raw materials.

"Market thinking has become conditioned to take Europe as a negative for market demand," said Duncan Hobbs, senior commodities analyst at Macquarie in London.

"In a couple of markets, lead and tin, which look finely balanced at the global level today, European recovery could be the difference that tips these markets into deficit overall."

While not swinging the copper market into deficit, European recovery should help reduce the surplus in the red metal, Hobbs said.

Europe is still the world's No. 2 buyer of industrial metals but its debt crisis and recession have hammered demand for them, with double-digit declines from pre-crisis levels.

Copper and steel have posted falls of about a fifth while the steepest decline came in tin, where demand sank by almost 25 percent from 2008 to 2012, Hobbs said.

But the euro zone emerged from a 1-1/2-year recession in the second quarter, with growth of 0.3 percent, and German analyst and investor sentiment jumped more than expected in September.

"Overall, Europe seems to have reached an important inflection point. The recovery in the euro zone should be sustainable, despite an unimpressive pace and the risk of fresh setbacks," UBS economist Reinhard Cluse said in a note.

PENT-UP DEMAND

UBS this week raised its euro zone growth forecast for next year to 1.1 percent from 0.8 percent and expects the area's industrial output - correlated with base metals performance - to rise 1.9 percent next year after falling 1.0 percent in 2013.

Demand for metals may undergo a burst of activity as consumers and businesses become more confident about the future.

"You'll go through a period of pain where you don't replace anything, but over time these assets depreciate so you'll need to replace them," said Nic Brown, head of commodities research at Natixis in London.

"If you're a household, you've got things like a house, car, white goods, and similarly on the corporate side, I think there will be pent-up demand to replace plants, machinery and vehicles that have gradually aged."

Europe accounts for about 15 percent of global consumption of most industrial metals, with nickel higher at 20 percent and carbon steel lower at 12 percent.

Those numbers are based on the metal content of goods made in Europe, but actual demand would be higher after accounting for imports of products containing metals.

Macquarie expects the lead market to be balanced next year, but a rise in European demand by 1 percent for the metal mainly used in batteries would mean 15,000 tonnes more consumption, potentially sending the market into deficit.

For lead and tin, the average tonnage lost to declining market demand in Europe over the last four years is more than any surplus expected in the global market next year, Hobbs said.

Copper lost an average of 202,000 tonnes a year of European consumption in 2008-2012, but if conditions return to normal the stronger demand could make a major dent in the projected global surplus of 594,000 tonnes next year, Hobbs said. (Additional reporting by Veronica Brown; Editing by Dale Hudson)

FILED UNDER: