London, 2 October 2011: Commodities Now

The ‘easy money’ halcyon days of 2009 and 2010 are well and truly behind us. The cyclical recovery in the developed world, combined with structural growth in the emerging markets that propelled demand and prices across the commodities complex, is gone. This “recovery trade” is a fading memory as commodity markets become increasingly embroiled in the “risk-on, risk-off” merry-go-round.

LME Week Supplement: The doom and gloom afflicting markets comes from the usual quarters – US debt, economic stagnation, eurozone crisis, and emerging market inflation, among others. Industrial production growth just about everywhere is slowing, whether because of relapsing economies in the industrialised world or through anti-inflationary tightening in the emerging one.

The question on everyone’s mind is whether or not we are likely to get some good economic news in the relatively near future or if we have to face the zombie economic aftermath of the stimulus packages. Faced with this, President Obama has promised a set of timely, targeted and temporary initiatives costing another $447 bn to boost US jobs and economic activity. The new plan – if it gets off the ground – calls for infrastructure investment. Similar intentions are being espoused elsewhere.

In the industrial metals sector our attention – as ever – is on the emerging markets, particularly in South East Asia and China. The outlook here remains surprisingly positive, and the key to the medium-term prosperity of industrial metal prices remains on how strongly China and the other domestically-driven and fast-growing emerging markets hold up in the current downturn.

Market concerns are turning to the possibility that events today may precipitate a similar crisis to the one that unfolded in 2008. Naturally, if this were to occur it would have negative implications for commodity markets, and metal prices in particular (excepting gold). “However, we believe that there are three important differences between now and three years ago,” says Michael Lewis of Deutsche Bank. We invited him and other market specialists to justify why – in the event of a major market disruption – metal prices are unlikely to behave as they did during that turbulent period.

The key word here is differentiation according to Dan Smith at Standard Chartered in London. “While commodities will remain pressured in the short-term from the waning confidence about the global economic outlook, several factors are likely to remain supportive for our long-held view of a sustained rise in metals prices over the coming years.”

Industrial metal prices have sold-off in recent weeks. Interestingly here, prices remain closely tied to equities, particularly for copper with its bellwether IP connections. If the global slowdown continues it is this part of the commodity complex which currently looks the most vulnerable. But differences between metals are extremely important in this scenario, which we explore in the pages that follow.

Importantly, this is not the first time investors in the sector have got jittery in the last three years. It’s just symptomatic of the unease out there about the global economy and the consequent gyrations of prices. As Suki Cooper at Barclays Capital recently noted; “Each time, the markets’ worst fears about the health of the global economy failed to materialise. Against a consistently positive picture for commodity market fundamentals of rapidly growing demand, struggling supply and falling inventories, prices rebounded rapidly.”

Enjoy reading and we look forward to any comments or suggestions you have for our future pages – either in print or online.

Ends --

Guy Isherwood, Publisher, Commodities Now

VIEW THE LME WEEK SUPPLEMENT 2011 HERE

This 2011 LME Week Supplement includes:

Foreword, Guy Isherwood, Editor-in-Chief, Commodities Now magazine

Keeping The Faith; Commodity prospects

Macroeconomic Imbalances, Global Liquidity & Commodity Prices, Walter de Wet; Standard Bank

Metals Q&A, Metal prices in the eye of a storm

LME: Exchange in Play; Not For Sale sign removed from 56 Leadenhall Street

China’s FDI in Mining; Threat or opportunity?

Metals Statistical Void Set to Grow; Investigating metals data

Exploration Budgets Leap; Preliminary estimates from Metals Economics Group

Capital Raising, Development & Exploration; Intierra Resource Intelligence

Investing in Commodities; Commodities in diversified investment portfolios

Metal Hedging Revisited; Rethinking metals hedging

Ferrous Metals TRM; Are we there yet?