The main plank for rising commodity prices and the basis for interest from the investor market has been demand from emerging markets, particularly Asia. Many analysts have seen the softening of demand in North America as being offset by a rising demand in Asia such that global demand will continue to outstrip supply for many metals and other commodities. The belief has been that the emerging markets can decouple their economies from those of the west such that Asia will power ahead while western markets languish with zero, or worse negative, growth.
So it is interesting to note that on top of reports of an imminent recession in manufacturing in many European countries we are also seeing growth forecasts slashed in Asia. Korea has slashed growth forecasts from 6% to 4.6% as the country faces the same problem the rest of Asia is struggling with ” inflation.
Indeed it may be runaway inflation and the need to raise interest rates dramatically that will put the brakes on these previously high octane economies. For the west to drop from 2 or 3% growth to 1% growth is painful but for the emerging economies to drop from 8-15% growth to 2-5% growth will be dramatic and will feel like a full blown recession. The corresponding drop in demand and de-stocking that will result in the metals markets could change the outlook from the current blind belief that demand must rise inexorably upwards. Inflation in Asia is on the verge of getting out of control with rates exceeding 20% in some markets like Vietnam and Kazakstan.
Even previously solid markets are seeing rising inflation like Thailand 8.9%, Philippines 10%, India 11%, Indonesia 11% and China where inflation has exceeded 10% for much of this year is not only raising interest rates but increasing bank reserves and allowing the currency to strengthen at an annualized rate of 20% in the first quarter, choking off exports, as the authorities desperately try to cool the economy. Cumulatively these changes will bring about slower growth and hence a more manageable demand. Let’s hope that feeds through into the metals markets in an orderly fashion.