While bankers and policymakers are “wringing their hands” about the global economy’s prospects, commodities traders seem unconcerned, says The Economist. Oil hit a new record last week, when copper futures too reached a near two-year high of more than $8,400 (they are up around 25% this year) and agricultural raw materials have also been on a roll. Aluminium has hit a nine-month high of $2,900 a ton, while lead and zinc have reached multi-month peaks.
The base metals upswing has been accelerated by investors being driven out of shaky stock and bond markets into the futures pits. “There’s a lot of liquidity out there” flowing into raw materials, says Bill O’Neill of Logic Advisors. But the key issue is concern over supplies. Labour and equipment shortages have hampered production growth – it takes eight times longer than usual for a large-haul truck to be delivered, for instance. Higher mining taxes in some countries, along with the credit crunch, are also boosting costs. According to Citigroup, copper production is likely to rise by just 2% this year.
In the meantime, shorter-term supply issues have highlighted how tight some markets remain. Power outages in South Africa and China (caused by snowstorms) have crimped aluminium supplies; output in China, the world’s top producer, fell by 7.6% month-on-month to a six-month low in January. Chinese zinc and copper production has also fallen.
However, demand has remained firm, with Chinese copper imports up by an annual 7% in January; last week, copper stockpiles touched a 16-month low. China is the main factor in overall demand growth and even assuming a “significant slowing” in its metals consumption this year, many market balances still look “sparse”, reckons Barclays Capital. Copper looks set to hit fresh record highs above $8,800 an ounce as inventories reach record lows in the first half; there is also ample scope for higher tin and aluminium prices. Goldman Sachs expects double-digit Chinese demand growth to underpin copper, its “preferred metal” this year, despite fears that a slowdown in the US could have a knock-on effect on China and its demand for commodities. With emerging markets driving commodities demand, strong growth in these markets should plug the gap created by developed world weakness, according to Barclays Capital – “providing widespread economic weakness can be avoided”.
But can it? As the FT points out, the main link between developed and emerging markets is trade, and given the lags in transmission the impact of the developed world slowdown may not be clear for months. But Citigroup has noted that 61% of Asian exports end up in Europe, Japan or the US, while according to Gary Shilling in Forbes, given that only 8% of Chinese and 5% of Indians can be categorised as middle class, there aren’t enough “big spenders to sustain growth in the face of weak exports”. Decoupling is “about to be disproven” and a global recession is in the offing, he says.
As we have often pointed out in MoneyWeek, the long-term case for commodities looks intact as the emerging world industrialises. But investors may soon be reminded that long-term bull markets don’t go up in a straight line.