Risk assets were expected to benefit from the liquidity unleashed first by the European Central Bank (ECB), which promised to buy distressed sovereign debt without any limits, and soon after by the US Federal Reserve, which said it will buy $40 billion (around Rs.2 trillion) in bonds without setting a date for this programme to end. Indeed, asset prices did move up as expected, but one asset class has stumbled.
Commodities have shed their initial gains seen since the first week of September, when ECB first announced its bond-buying plan. The Thomson Reuters/Jefferies CRB Index, a broad indicator of commodity prices, has fallen by 0.7% since then. That is in contrast to what’s visible in the equities space, where the MSCI Index for Asia ex-Japan is up by 7.7%, while the MSCI World Index is up by 4.4% since the first week of September. Gold prices have risen by 3.2% over the period.
Could commodity prices be reacting more to the bad news on the demand front, as emerging economies are no longer the growth drivers they were in previous years? China occupies the centre stage, as an economic slowdown is forcing global companies to scale down their demand projections. Alcoa Inc. lowered its growth forecast for China’s aluminium consumption to 9% from 11%. The previous forecast was announced in July.
Metals and fuels will bear the brunt of a slowdown in China. Indeed, LME (London Metal Exchange) spot prices show the strain, with aluminium prices down by 1.6%, while zinc prices are down by 0.5% since the first week of September. But copper is telling a different story as it has risen by 5.1%, which puts a question mark on whether the China impact is being overstated. But there may an explanation for this.
The International Copper Study Group released its latest forecast for the metal, in which it expects demand for copper to rise by 2.6% in 2012, but production of refined copper is expected to grow by just 1.5% due to a shortage of copper and maintenance shutdowns. A supply deficit may be putting a floor under copper prices. But that situation may change in 2013, when demand will slow down to 1.2%, but production may rise by 6%.
As for other metals, Alcoa cut its global demand forecast for aluminium from 7% to 6%, and cut its deficit (supply less demand) forecast for the metal by nearly half. Similarly, the International Lead and Zinc Study group, too, recently released its forecasts for 2012 and 2013. Both metals are expected to see an oversupply situation, as capacities that were planned during a boom phase are coming up during a year of slowing growth.
Commodity prices may not have swelled up as much as equities did in the aftermath of quantitative easing (QE). But perhaps their decline may have been more severe, if not for this liquidity support. The fact that commodity prices have been contained will come as a relief to the Reserve Bank of India, which has repeatedly worried that monetary easing in the West could feed inflation in India.