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Life’s but a walking shadow, a poor player

That struts and frets his hour upon the stage

And then is heard no more: it is a tale

Told by an idiot, full of sound and fury,

Signifying nothing.

This famous passage from Shakespeare’s Macbeth (Act 5, Scene v) about life itself appears to characterize recent movements in commodity markets. Despite dominant fears of inflation everywhere, commodity markets in general and metal markets in particular have been in free fall.

The first globally synchronized growth year after the Global Financial Crisis (GFC) was in 2017. Central banks around the world had begun to tighten monetary policy just after that and nearly 10 years after the dramatic reduction in rates to combat the GFC. The US Federal Funds rate rose from a low of effectively zero in December 2008 to a high of 2.5% in 2018. With the onset of the pandemic, that rate was again lowered to zero in April 2020. Despite occasional zigs and zags, metals have been on a downward trend in terms of real prices (adjusted for inflation) for many decades. This is as it should be. As demand rises for metals, supply rises over time to (more than) catch up with demand and exert downward pressure on prices. As a case in point, the peak all-time real price of copper was back in 1865 CE.

In the last two decades, commodity prices have risen in nominal terms every time there has been a sharp reduction in interest rates, particularly if accompanied by quantitative easing. As the Fed doubled the size of its balance sheet to $9 trillion, the price of copper more than doubled to $5 a pound from a trough in March 2020 to its latest peak in February 2022. Similarly, zinc doubled to $4,500 per tonne and steel doubled to Yuan 6,000 per tonne over that period. Since then, silver, copper and steel are down more than 20% and iron ore and hot-rolled coil steel are down more than 40%. The only metal to buck the recent declining trend in metals has been lithium, which is up nearly 1,000% since its trough in 2020, mostly on the back of extraordinary demand for electric vehicle batteries.

So, contrary to what is casually believed, metal prices have broadly been declining at a time when inflation has become a major concern. In actuality, the recent peak in metal prices has generally coincided with the beginning of significant inflation fears. The metal price declines since then may be explained by five factors: 1) As central banks around the world have woken up to the inflation fight and begun to tighten policy, metals are beginning to reflect ‘slowdown’ fears; 2) as liquidity is being withdrawn, activity in metal futures has fallen sharply, particularly because futures speculation takes place with leverage; 3) the ‘zero covid’ policy in China has dramatically reduced demand for industrial metals; 4) as the dollar has rallied, commodity prices have fallen but metal prices in other currencies have not fallen as much; and 5) these price declines follow the earlier sharp price rises, and in many cases, prices still remain above the levels of 2019.

Recently released US second quarter 2022 economic figures suggest a technical recession there. Consequently, markets have dialled back expectations of aggressive monetary tightening by the US Fed, and metal prices have halted their decline. It appears from recent action that metal markets are not the ‘leading signal’ of economic activity or inflation that market participants might hope for. Rather, like other markets, metals are responding to action by central banks and are ending up as contemporary indicators. The next significant move will come only if the Fed changes course unexpectedly and/or the Chinese economy begins to grow significantly again.

The latest official growth figures from China points to a seasonally adjusted 2.6% decline in second quarter gross domestic output. China may well clock a technical recession in the third quarter . Other than the initial pandemic quarter in 2020, this is the lowest growth rate in over 30 years and makes China’s annual growth target of 5.5% almost impossible to achieve. With more than two dozen cities still under some form of lockdown, its immediate growth prospects appear to be limited, which in turn will keep a lid on industrial metal prices.

The Fed’s dot-plot suggests that governors of the US central bank believe that dollar short rates will peak in January 2023 at about 3.3% and then decline to an average of about 2.5%. This is a little lower and a bit earlier than expected just last month. This reduction of aggressive tightening will likely put in place a floor for metal prices. Between the Fed’s actions and China’s slow-down, metals will probably trade in a range for some time.

Movements in global metal prices are of meaningful consequence to companies in India. Particularly since many metal prices are still set in US dollars, the impact of price escalation hurts even more if the rupee depreciates against the dollar. Given the downward price in commodities and upward movement in the dollar, the price of copper in India in rupees per metric tonne has remained in a small range for over a year. Aluminium, zinc and tin have declined modestly in rupee terms. The inflationary pressure from a rise in commodity metal prices in rupee terms, thus, appears to be behind us.

All that fury, signifying nothing indeed.

P.S: “The story that data tells us is often the one we want to hear," said Nate Silver.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand

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