The early part of the year has seen numerous stories about copper leading the base metals complex down, amid persistent fears about global economic conditions. Copper prices were seen to fall in February, as equity markets weakened and observers expressed concern about metals demand.
The outlook for the world economy is clearly a worry. BHP Billiton’s latest analysis of global economic trends expects “robust economic growth in many major economies”, but notes that the pace of global economic activity has moderated and that “while emerging market economies continue to grow strongly, downside risks to the global economy exist with persistently high oil prices and the downturn in the US”.
While estimates show global economic growth slowing, the picture is far healthier than in the US, where last quarter’s GDP growth was a mere 0.6 per cent and is set to be slow this quarter. The question is how closely linked metals prices are to the performance of the US and the strength of financial markets, particularly equities. Does a weaker Wall Street drag copper down?
Such a pattern seemed to emerge at times in the last quarter, and certainly changes in investor sentiment ripple from one market to another, but after seeming to follow equity markets downwards, copper prices have quickly rebounded, mainly on tight fundamentals.
“It is a question that everyone grapples with. Since January, there has been growing pessimism about the US economy, forecasts have been downgraded and share prices have been falling, but our LME commodities – copper and aluminium – are rising, as are prices for iron ore and coal. The market is not seeing a link between the sharp move in market perceptions and commodity prices,” says Vivek Tulpule, chief economist for Rio Tinto.
Some analysts believe weaker stock and debt markets may support metals prices over the medium-term.
“Physical fundamentals are softening as global growth slows down. Base metals look good relative to equities and bonds, so there is still a re-allocation of money to commodities. The uncertainty in the global economy gives strength to the base metals complex,” says John Kemp, analyst at Sempra Metals.
On fundamental grounds, there is also a growing consensus that the performance of the US economy no longer shifts the dial on commodities as it did in the past, since weakness in the States is cushioned by growth in China and India.
“We don’t know if the US is in recession yet, but growth is sluggish, while China is growing at over 11 per cent. There is a fundamental delinkage between the old world and commodities markets. Commodities are now a ‘new world’ product class,” believes Tulpule.
BHP analysts concur, noting that “since much of the future incremental demand for commodities will come from China and India, a slowdown in the US is likely to have less impact on commodity prices than in the past”, though they also expect major developed economies recover from recent instability.
The balance of the global economy is changing. As it does so, the old hard-and-fast rules are increasingly inappropriate.
