It is tough making sense of the commodity markets at the best of times and these are far from the best of times. Metals prices are being driven by several, often conflicting, pressures. On the one hand, currency movements, particularly in the US dollar frequently creates price movement in spite of fundamentals. The dollar has weakened significantly last week on a combination of greater risk appetite by investors and a general perception that quantitative easing will lead to inflation sooner rather than later. A number of good news stories such as this report in the FT have helped make investors feel more comfortable with holding other currencies, not least of which has been rising stock markets and a sense that we have hit bottom and the only way is up, however slowly that may be. As the dollar strengthens, typically the metals prices, particularly copper, fall. As the dollar weakens, metal prices rise. Whether this is because metals are seen as a hedge against currency movements, so as the dollar slides investors buy commodities to protect capital, or whether it is because there is recognition that for metals buyers in other currencies, as the dollar weakens they can pay more for metals because the Euro, Yen, RMB cost becomes lower is debatable. The fact is the relationship exists and frequently manifests itself unless contrary drivers are moving strongly against the trend.
We have been constantly following the effect of China’s State Reserves Bureau purchases of copper, zinc and aluminum since the beginning of this year. Chinese buying, both by the state and from private investors and traders has lifted metals prices by 25-30% in spite of a series of bad news announcements regarding demand in the rest of the world. As that process has paused in May the price rises have also stopped and other drivers such as currency have come to the fore.
Since the crash in prices started in the early fall, producers (outside China) have been cutting production. Some metals categories and some parts of the world have moved more dynamically than others but the broad pattern has been a reduction in mines and smelting facilities. As ore grades have become uneconomical, mines have closed. Some cannot re-open unless prices rise substantially higher than they are now. Under normal circumstances, this would have been enough to bolster prices even if the market was not immediately brought back into supply/demand balance.
Contrary to the demand fundamentals of the last two months, the prevailing drivers at the moment are risk appetite and currency. It will be interesting to see how long this continues. Merrill Lynch feels the stock market optimism in Asia is overdone. A sharp correction could bring down metals prices with them. As always, metals buyers have to juggle so many often conflicting drivers when trying to forecast prices it is enough to make your head spin. For our part at MetalMiner we will continue to report developments as they happen and may be more important, provide our interpretation of what they mean.