PMI

Supply and demand for each base metal certainly has its own set of characteristics and remains the main reason why analysts study them separately. After all, it makes sense that inventory levels and supply shortages would affect each metal differently. And though you our readers may only buy one or a sub-set of all the metals we track here at MetalMiner, we thought it might still make sense to broadly evaluate all base metal price trends particularly since many other commodities arguably follow similar trends.

Copper Alum

 

Copper vs Aluminum LME monthly cash price, relative scaling.

 Source: LME, MetalMiner

A pair of base metals can highly correlate during a period of time but may diverge in the short term. The key becomes understanding and knowing when a particular correlation appears strong vs. when it begins to shift. As we can see in the graph above, during the past five years, copper and aluminum have followed the same medium to long-term trends. In fact, we have seen the same behavior for the other base metals including: lead, nickel, tin and zinc:

Base Metal Compare

 

Lead, Nickel, Tin and Zinc LME monthly cash price, relative scaling.

Source: LME, MetalMiner

When comparing prices, the sharpness in price peaks and troughs differs from metal to metal but when we look at the overall picture, we see that the six base metals analyzed have followed similar patterns. From 2008 until today, correlations among the base metals have held over 70% (Editor’s Note: anything over 70% is considered a strong correlation) and for some pairs the correlation measures even higher. In the case of lead and zinc the correlation is 94%.

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So, if each base metal has different applications and sources of supply, what makes them behave similarly?

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Continued from Part One.

Across Europe, figures understandably vary. Whereas Germany and France’s jobless rates held steady at 5.7 percent and 10 percent, respectively, Spain’s hit 23.6 percent in February, up from 23.3 percent in January and Greece’s was at 21 percent in December — since then, the authorities have been unable or unwilling to continue reporting the numbers. Unemployment among 18-25 year-olds though, is greater than 50 percent in both countries.

Meanwhile, PMI numbers are falling. Spain’s fell to a three-month low of 44.5 in February and Greece recovered to 41.3 from a record-low 37.7 in January, the economy is clearly still contracting fast. In Germany, manufacturing contracted last month while in France activity dropped at the fastest level in two and a half years, according to the WSJ.

With China slowing (the latest official PMI figures conflicting with HSBC’s showing a decline suggest no more than the general trend is still positive, if slower) and raw material costs rising, Europe will continue to be a drag on global recovery.

Indeed, it is those rising raw material costs that probably present the greatest challenge. Globally, input price inflation in March was the highest in eight months, with rising oil prices presenting the drag on GDP, representing a massive transfer of wealth from developed economies to oil producers.

It is possible the US’ recovery over the last 12-18 months has in part been due to the historically low natural gas prices and the knock-on suppression of chemical feedstock prices. It could also be argued that the large delta between global oil prices (as displayed by the Brent crude price) and US crude prices (as displayed by West Texas Intermediate) has also benefited the US relative to Europe.

As the US gradually adds unconventional oil to its reserves of unconventional natural gas, this advantage may be enhanced, but the economies of scale, unified politics, and integrated redistributive taxation — not to mention single official language — continue to support the more dynamic nature of the US market relative to Europe’s, debt crisis or not.

Image source: euro2009.blindsoccer.org

Although profit margins for US manufacturing corporations seem to have fallen off the past couple quarters after consistent rises since the aftermath of the Great Recession (seen above), the US manufacturing economy overall is still trucking.

Going by one of the most prominent indicators across industries — the Institute for Supply Management’s PMI figure — the ISM reported just this week to be “53.4 percent, an increase of 1 percentage point from February’s reading of 52.4 percent, indicating expansion in the manufacturing sector for the 32nd consecutive month.”

For both US manufacturing at large and the metals industry specifically, there are, of course, myriad indicators that could point to whether prices will rise or fall. One of these indicators is service center/distributor inventory.

In writing about the stainless steel market, for example, my colleague Lisa put it this way: “Inventory in general serves as a double-edged sword. If inventories remain lower than the historical average, one might assume the supply chain will need to re-stock, hence demand will rise. If inventory is higher than the historical average, then “burning it off” so to speak lowers demand and hence pricing.”

Which should illuminate the latest figures from the Metals Service Center Institute (MSCI). According to an MSCI press release, steel product inventories increased 1.8 percent from January to February 2012, and 12.5 percent over February a year ago, to 8,924,500 tons at the end of February 2012. This represents 2.4 months’ supply in inventory, down 1.6 percent from a year ago, MSCI said.

In terms of aluminum, inventories of aluminum products increased 4.6 percent over February a year ago to 374,700 tons at the end of February 2012, which represents 2.9 months’ inventory supply — an 8.8 percent drop from a year ago, according to MSCI’s release.

On the whole, total inventories of manufactured durable goods in February, up 26 consecutive months, increased $1.4 billion or 0.4 percent to $373.6 billion, unchanged from the previously published increase, according to the latest US Census data.

However, this number represents the highest level since the series was first published on a North American Industry Classification System (NAICS) basis and followed a 0.6 percent January increase, according to census analysis.

Image Source: US Census Bureau