METALS INSIDER: Things can only get better?

-- Andy Home is a Reuters columnist. The opinions expressed are
his own --

By Andy Home

LONDON, Dec 19 (Reuters) - Such is the avalanche of bad news
about the global economy that the latest housing start figures
out of the United States merited little headline coverage in the
media.

Yet the figures released earlier in the week were doubly
significant, heralding both further misery for the bombed-out
home-building sector in the U.S. and signalling that industrial
metal demand has further to fall before there can be any talk of
recovery.

STILL PLUNGING

The U.S. housing market is arguably where all the world's
current economic woes started.

It was the pricking of this particular asset bubble that
introduced the world to the previously little-known concept of
subprime debt.

The toxicity of this debt, masked by the financial house of
cards that was the credit derivatives market, has subsequently
poisoned much of the global financial system.

The U.S. housing sector is also where financial crisis first
morphed into real economy crisis as home-builders slashed build
rates in reaction to falling house sales and rapidly-deflating
property prices.

What the latest new build figures show is that even 18
months on from the original subprime explosion, there has been
no recovery in the toxic heart of the financial meltdown.

Indeed, the pace of new housing starts slumped in November
by a massive 18.9 percent to an annualised 625,000 units, the
lowest level recorded since the U.S. government started
compiling figures in 1957. Starts were down by an extraordinary
47 percent on the year-earlier level.

The level of building permits is a strong indicator of
future home-building activity and there was no joy in this
component of the report either. Permits fell to an annualised
rate of 616,000 units, down by 15.6 percent from October and
down by 48.1 percent from November 2007.

Such a steep drop in new home building is required for the
overhang of unsold stock to be worked off, but it means further
bad news for any metals fabricator with exposure to the
residential construction sector.

The pricking of the housing asset bubble started in the
United States but has spread to other countries, where cheap
credit over-inflated property prices. In Europe, the worst
affected countries have been Spain, the United Kingdom and
Ireland.

In Asia, it is China that is paying the price for a
previously super-charged property sector via falling prices and
plunging new build rates.

WHERE'S THE BOTTOM?

The automotive sector, another key end-use sector for
industrial metals, has been the second major transmitter of
financial crisis to real-economy crisis.

Here too things have deteriorated sharply since the first
signs of weakness became apparent at the end of 2007.

Not only is the U.S. automotive industry now teetering on
the edge of Armageddon in the form of a potential bankruptcy
among the Detroit Big Three, but collapsing auto sales have
become a global phenomenon.

Commercial vehicle sales sank a record 30.8 percent in
Europe in November, while in Japan a gloomy Satoshi Aoki,
chairman of the Japan Automobile Manufacturers Association, told
reporters: "It's very difficult to gauge where the bottom is."

There, in a nutshell, lies the short-term problem for
industrial metal prices. The recessionary dynamic has spread
through the entire global manufacturing sphere and no one can
yet say with any certainty where the bottom of the current cycle
lies. Only when activity stops contracting or at the very least
when the contraction shows signs of slowing will any confidence
about metals demand return.

Still-broken credit markets, interest rates close to zero in
the world's two largest economies, the U.S. and Japan, and signs
of a severe slowdown in China do not instil much confidence in
the short-term economic outlook.

A DISTANT LIGHT

Over a longer time horizon all is not doom and gloom. Big
stimulus plans, particularly the infrastructure-heavy one
unveiled by Beijing, will be broadly positive for metals but
only when such programs build sufficient momentum to start
making a tangible impact.

Accumulating production cuts, particularly in the steel,
zinc and nickel sectors, are also a positive indicator that
these metals will not be burdened with mountainous stocks once
recovery does begin. Alas, for aluminium it is already too late!

In addition, contrarian commentators are already pointing to
the impact on future metals supply of the ongoing ravaging of
the global project pipeline. As metals companies slash capital
expenditure and development budgets, new mines are being shelved
or deferred. The implications are that the industry will be as
badly prepared for a pick-up in global demand as it was at the
start of the last bull market. Things, then, will get better --
eventually. But as the U.S. home construction figures show, they
will unfortunately get a lot worse first.

On that happy note, Seasons Greetings to all readers! This
column returns in the New Year.
(Editing by Karen Foster)