Metal prices mauled as shipping sinks

IF you want to know what is likely to happen to commodities demand, watch the ships.

Watchy both those that carry the bulks and those that deliver the finished products.

The portents are not good in either case.

First, the Baltic Dry Index which reflects demand and prices for bulk carriers has hit its lowest point since November 2002 when metals demand was in the doldrums.

The vessels that carry iron ore from Australia and Brazil constitute a large part of the index.

The Baltic Dry Index stood at 1506 as the week ended -- a massive fall from the 11,893 points at which it stood as recently as May.

The problem is not just the market's view on forward demand for commodities, although that is a large part of it. Rather, It's the global credit crunch. Reports from London indicate that ship owners are having trouble getting banks to sign off on letters of credit for the cargoes.

Then, on the demand side, it seems that the US consumer downturn is having its effect. In September, inbound container numbers at the Port of Long Beach in California were down 15.8 per cent on the same time a year earlier.

Bloomberg reported at the weekend that China's second-largest container line is expecting a 10 per cent downturn in volumes for the full year, with exports to Europe and North America falling since the start of August.

An official of China Shipping Container Lines, Zhang Denghui, was quoted, saying that global economic slowdown had hurt demand for Chinese products.

Most of the base metals managed a small recovery on Friday but the rally was not convincing.

Nickel managed an anaemic bounce of just $US20 a tonne to close at $US10,800/t -- less than a third of the price the metal was fetching a year ago. The International Nickel Study Group said that use of the metal fell in August, the five month of decline in a row.

Copper managed to gain $US160 to close at $US4810/t.

While lead and zinc also made small gains, their levels of $US1440/t and $US1230/t will put extra pressure on companies that mine those metals.

Fat Prophets analyst Gavin Wendt said zinc and lead miners would be forced to close more capacity or postpone developments.

"It's just not sustainable at this level," he said, adding that the falling nickel price would also hit high-cost producers, particularly those working or developing the complex laterite ores. Norilsk Nickel has already decided to idle its Cawse laterite mine in Western Australia.

Mr Wendt said the Australian nickel industry was more vulnerable now because of the large number of small producers who could not afford to close down capacity.

Back when the then WMC dominated the industry, it would have shut several mines to help force the nickel price back up.

Among the precious metals, platinum continued its sharp falls, losing 15 per cent on Friday to close at $US866 an ounce.

London-based metals analysts GFMS sees platinum oversupply in calendar 2008.

"Platinum will see a fundamental surplus of anything up to 150,000oz and, given the state of the global economy, one has to concede that the risks lie on the downside," the company said.

The platinum outlook has turned down after it was clear that power supply disruptions in South Africa would not have as great an effect on the miners as had to be predicted. On top of that, demand for platinum by jewellery fabricators has plunged.

It is feared that a downturn in automobile manufacturing will hit demand for platinum, which is used in catalytic converters.