London, 1 February 2012, Commodities Now

Standard Bank Focus: Much has been made about the performance of commodities (and other asset classes) during the first month of 2012. Both gold and silver have had the best start to the year since the 1980’s. For base metals, we’ve seen the strongest performance during a January for at least the last four years. However, the feeling at Standard Bank is that the enthusiasm these numbers have generated is overdone, especially for those metals with industrial applications. In short, January's commodity performance has not underpinned by real demand.

"In our view, this past month’s performance has more to do with the expectation of growing liquidity (with last week’s dovish announcement by the Fed a major catalyst) than the promise of a stronger global economy," says Marc Ground of Standard Bank Research.

"In our view, it is too early to expect real demand for industrial metals to improve and rallies to be sustainable. We maintain this view despite the optimism generated by the overnight release of slightly better-than-expected Chinese PMI manufacturing figures. On closer inspection, the improvement was driven mainly by increases in import prices and raw material inventories, with output and new orders relatively flat and new export orders falling sharply. We will admit that early Lunar New Year celebrations might have dragged the January figure down but are unconvinced that February’s reading will show a marked improvement. Slowing growth in Chinese electricity production points to slower manufacturing activity. In addition, construction growth in China (a big source of demand for copper, aluminium and zinc) continues to decline.

"In addition, should any monetary loosening by the PBoC be on the horizon, it typically takes 12-18 months to filter through to the real economy. As yet, a decrease in the reserve requirement has been the preferred policy tool. We expect this to be the case going forward. Our research has revealed this particular monetary policy instrument to have the most benign effect on commodity prices."

Turning to the other major regions of industrial demand, Standard Bank don’t foresee much strength there for at least the next 3-4 months. Europe will most likely remain in a recession for H1:12. While the outlook in the US does appear more hopeful, yesterday’s extremely disappointing consumer confidence data (61.1 versus an expected 68.0) underlines the fragility of that economy’s recovery.

"Consequently, we feel that the downside for industrial metals (PGM included) remains exposed and would caution against getting caught up in the current euphoria. Of course, the gap between current fundamentals and the market’s optimism could persist for some time, especially if central banks continue to bolster expectations of growing liquidity. However, should these effects dissipate, we could see a marked correction off the back of weak real demand," says Ground.

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