The Organization for Economic Co-operation and Development (OECD) in Paris has just released their Composite Leading Indicators (CLI) for the major economies. Despite the dry economic analysis, one can read some very interesting predictions. I should start here by defining CLI as a qualitative rather than quantitative measure of the trends in an economy. A CLI above the long term average of 100 suggests an economy on a growth trend. Below 100 suggests an economy on a slowdown. It can be more subtle than that but for our purposes we are looking at the medium term trend rather then month to month implications.
You won’t be surprised to hear that the US has been falling since August, not below 100 but gradually decreasing from 102.1 in August to 100.4 in November. Since then it has entered negative territory and is predicted to stay below 100 for 2008. Interestingly Canada, France, Japan and Italy have all been below 100 since the summer and the Major Seven taken as a whole fell below 100 in September and have gradually declined further since.
Of the emerging markets, Brazil showed the greatest growth of 108 during the second half of 2007 and is predicted to continue with strong expansion in 2008. India and Russia were more moderate in 2007 but are predicted to continue with moderate expansion in 2008, although the longer term outlook for Russia under increasing state interference is less encouraging. The interesting figure is for China where the trend went from 105 in September to 103 at year end followed by a further 0.9 decline last month. The OECD predicts a possible downturn in China during 2008 and though they do not explain the causes we believe the one two punch of rising export taxes in July Ã‹Å“07 and January ’08, and a strengthening RMB exchange rate which has moved from 7.6 in the summer to 7.19 today and is predicted to move to 6.8 by summer could further slow that economy.
The export taxes have choked off exports of steel and many lower value-add non ferrous metal products almost overnight and the rising RMB is gradually making China less attractive as a source for many more basic high volume export goods. This is the first major analysis that we have seen supporting a significant downturn in China’s robust growth during 2008/9 but it probably won’t be the last.
While we find this all very intriguing our real interest is what affect this may have on the already volatile metals markets. Copper, along with the other non ferrous metals markets has rapidly risen over the last few days on the back of supply disruption concerns in China and South Africa. Rises we feel are not justified and will unwind in the coming weeks. If the economy is cooling faster than we think then expect these falls to go further than a mere correction. Much of the increased global demand has come from China as huge investment has gone into industry and housing. This won’t evaporate but on top of reduced demand in the developed world a slower pace of growth will bring supply more readily in balance as new projects in the pipeline come on stream.
Steel prices have been driven early this year by a combination of rising iron ore, coking coal and energy costs on the one hand and a strong market demand on the other. During the latter part of 2007 we saw that demand come off in certain product areas but a weak US dollar kept imports out of the US market. In addition, low distributor stocks meant demand for US mills remained strong. A softer demand from China would take some of the heat out of the spot market for iron ore and allow long term contracts to be agreed to at more reasonable levels. With less aggressive input costs, the mills could respond to the falling demand in the North American and European markets. Steel market contacts have been telling us they see prices rising through the end of 2008 but we can’t see it and these early indicators from the OECD only confirm our feeling that the latter half of 2008 will see the steam come out of the steel market and an easing in the non ferrous metals market ” welcome news for consumers if we are proved right.