Mark to Market | Metal prices dip on growth concerns

Mark to Market | Metal prices dip on growth concerns

If global growth is going to slow down, as the International Monetary Fund, the Organisation for Economic Co-operation and Development and practically every economist seems to believe, if the world’s largest economy, the US, slips into a recession and if the Chinese government’s measures to curb runaway growth start working, as seem to be indicated by the lower industrial production numbers for November, then demand for industrial metals is almost certain to be affected.

A relatively new theory doing the rounds in recent months has been the decoupling thesis, which believes that the non-US economies will be able to pick up the slack in the event of a slowdown in the US and global growth, while it may falter a bit, will remain relatively robust. That thesis has received a boost from data that show that more than half of incremental growth now comes from the developing economies.

However, the data on metal prices show no such thing.

Consider, for instance, Economist magazine’s commodity price index. The metals index, in dollar terms, was 245.6 on 11 December, well below its level of 286.5 two months ago, on 16 October. Three months prior to that date, on 10 July, it was 294.1, while it was at 312.4 on 10 April.

To cut a long story short, the dollar metals index on 11 December was 12.1% lower than a year ago. And it’s worth noting that this is the dollar index, which means that metal prices should actually have gone higher, because the dollar has been depreciating. The story that the metals index is telling us is that the global economy is slowing sharply.

On the other hand, the Economist’s food index has been rising all along, from 157.3 on 10 April this year to 193.6 on 16 October to 210.7 on 11 December. It’s 38.1% higher than a year ago. Clearly, there is a dichotomy between the rising prices of food and the lower metal prices, brought on by lower agricultural production and the diversion of farmland to the production of ethanol.

There are other dichotomies: oil prices, for instance, are up 46% (for West Texas Intermediate) year-on-year and gold prices are up 28.6% in dollar terms.

Independent firm BCA Research points out that the LME (London Metal Exchange) metals index is down both in dollar and in euro terms. It also says that the copper-to-gold price ratio has been falling sharply. Says BCA, “the CGR (copper-to-gold ratio) plunged when central banks fell behind the deflation curve (i.e. 1992-1993 and 2001-2002) and surged when rates were normalized or policymakers were struggling to cool growth (1994, 1999-2000 and 2003). The current breakdown in CGR suggests that more liquidity is needed to reflate the global financial system and keep the economic expansion on track." In other words, copper prices are falling on worries about gold, while gold prices are rising because it’s considered a safe haven in times of trouble. The slide in metal prices is not confined to copper. After touching close to $25/lb in May, nickel is currently trading around $11.60/lb; the zinc price has halved since the beginning of the year. Only lead is now trading at a higher price than at the outset of the year, although its price too has fallen sharply in the past three months. Last Friday, Goldman Sachs Group Inc. downgraded its rating on the mining sector to “Neutral" from “Attractive", triggering off a wave of selling in mining stocks.

There are other signs and portents of a growth slowdown. The currencies of countries that are predominantly commodity exporters, for instance, have not been doing well lately. The US dollar now buys 1.146 Australian dollars, compared to 1.106 two months ago. Similarly, it’s worth 1.10 Canadian dollars, while it was worth 0.97 of them a couple of months ago.

Yet another measure of a looming growth slowdown is provided by the Baltic Dry Index which is 10% off the all-time high reached on 13 November.

Metal stocks in India, however, have remained immune to the deteriorating price trends. The BSE Metals index is up 124% year-on-year and 11.4% from a month ago. That’s partly because of the big presence of steel companies in the index and because the steel industry follows a completely different dynamic, with prices expected to rise next year.

Its also true that most Indian metal producers have their own raw material sources and growth in India will remain strong. But with commodity prices being benchmarked to global trends, Indian commodity producers too will be hit.

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