VINACHEM

While Greece may be a minnow, Europe as a whole is one of the most important sources of commodities demand, driven by the manufacturing hubs of Germany and Italy.

The region accounts for almost a quarter of global consumption of oil and nickel, and around a sixth of other metals such as copper.

Anecdotal reports from physical traders, who are often the first to witness changes in sentiment, suggest that purchases have dropped sharply.

Demand for most industrial commodities has contracted in the final quarter of the year, traders estimate – in some cases, sharply.

“For the past six months, we have seen consumers buying a little bit when the price dips; now that is happening less,” says a senior commodities banker, on European demand for metals.

“Right at this point in time, it’s beginning to feel like 2008. The physical side has died a death. Consumers, fabricators and even producers are trying to offload metal.”

The shift offers an early indication of what many believe is now a period of recession in the eurozone economy.

It has also darkened the outlook for commodity prices significantly: several prominent investment banks, including Morgan Stanley and JPMorgan, have recently turned outright bearish on the sector.

As Colin Fenton, head of commodities strategy at JPMorgan in New York, says: “The outlook for global industrial metals consumption has deteriorated significantly.”

Some traders are grimmer still. Demand for uncontracted material – or “spot” deliveries – has dried up almost entirely, they say, while some consumers are asking suppliers to delay their contracted deliveries until next year.

Summing up the mood among the continent’s physical commodities traders, Gordon Buchanan, a trader at specialist nickel trading house Stratton Metals, says the market is “pretty miserable”.

Up-to-date statistics confirming the trend are thin on the ground. But where they exist, they offer some affirmation of the grim mood. European aluminium orders, for example, fell 20 per cent in October from a year earlier, according to the European Aluminium Association.

Physical premiums – or the price a buyer is willing to pay over and above the level of the futures contract to secure delivery in a particular location – have dropped almost universally across the metals markets, notes Duncan Hobbs of Maccquarie, indicating a fall-off in purchases.

European spot copper premiums are at their lowest since 2009 while aluminium premiums have dropped 25 per cent since the middle of the year.

In the oil market, margins for European refiners, an indicator of the state of the regional market, have fallen to around $3.50 per barrel on a gross basis, down from an average of $6 last year and $5 so far this year, estimates to James Zhang, of Standard Bank.

Overall, traders and industry executives estimate a drop of as much as 30 per cent in aluminium buying and 15 per cent in sales of copper wire rod – a good indicator of economic activity as it is used to make electrical wires.

But much of that drop is simply a reflection of destocking activity, rather than falling end demand, industry executives say. As such, it could be rapidly reversed if the economic fog clears.

“People are waiting, being careful,” says one copper industry executive. “The key word is uncertainty.”

Moreover, the state of demand in Europe varies significantly between different commodities and end uses. The weakest market is nickel, suffering from a sharp downturn in the stainless steel industry.

In the aluminium industry, some areas of demand such as the packaging and construction industries have contracted sharply, traders say, especially in southern Europe.

A physical aluminium trader for a large trading house describes Italy as “a disaster zone”. “Everyone has been having pushback on contracts this year in the second half,” he says.

On the other hand, the carmaking and aerospace industries – especially in Germany – have not slowed and their intricate network of suppliers still has full order books.

Copper traders are also in better spirits. Demand for 2012 remains solid with consumers booking similar volumes for delivery as this year, they say.

“We haven’t seen too much of an impact of the crisis,” says an executive at a large copper miner.

Lead, used mainly in car batteries, is stronger still, with traders and analysts reporting little impact from the crisis and physical premiums rising.

And for all the grim news from Europe, the outlook for both metals and oil markets will ultimately hinge on China – which ever since the 2008-09 crisis has represented the vast majority of demand growth for industrial commodities.

“I don’t think what we’re seeing now is anything to fundamentally change the overall picture for the metals,” says Gayle Berry, metals analyst at Barclays Capital. “What will determine that is how long the European issues drag on and if they spread to China.”