This is part one of a two part series which we will continue this afternoon. Part One examines the hypothesis: Are Industrial Metals Really on the Rise? Part Two reviews the specific metals markets and draws conclusions.
Many industry observers would certainly have us think that indeed, industrial metals are on the rise. Consider some of the following recent statements:
From a recent article entitled, CRB Spot Indices Suggest Growth Happening, Inflation Coming, We think that the CRB Spot indices are a better means by which to judge the movement in commodity prices because they are based on spot (here and now) prices not highly volatile prices for future delivery. We won’t argue with that statement but the author goes on to say the following, Secondly we think that the CRB Spot Raw Industrials Index is the best representation of what is happening in the industrial heartland of the world economy ¦advances in copper prices is nothing but random noise unless it is accompanied by advances in the prices of commodities like rubber, zinc, cotton and wool! The author explains that by reviewing spot commodity prices in comparison to other prices, one can gain a sense of where the commodity markets will go – so far, so good.
And finally, the big conclusion, The behavior of the CRB Spot Industrial Index suggests that there is a genuine industrial demand for commodities (not just stockpiling by the Chinese that your average economist would have you believe). I guess I’m just average then because though we’ve seen a run-up in base metal prices, let’s face it they are coming up from the bottom of the ocean floor! The question to ask involves, sustainability. Will the industrial metals markets continue to rise?
According to a second article on Seeking Alpha, Industrial Metals Should Move Significantly Higher the author says, ¦if industrial metals are rising on a rolling 100 day basis, it is highly likely that it is because of a change in fundamentals (albeit perceived). Specifically it is due to demand outstripping supply and indicates a rise in world industrial activity and inflationary conditions. Despite the words albeit perceived the author goes on to say that the move up is very real with more upside. He postulates that world growth is picking up and even that this may be the next TMT bubble (technology, media and telecoms bubble).
Admittedly, as an average economist I don’t spend a lot of time looking at commodity charts and analyzing body parts i.e. shoulders, heads or tails. And I don’t mean that as a slam. I admire technical traders. But we do spend considerable time looking at economic indicators, demand patterns, re-stocking patterns and industry sentiment. We look at what metals producers are saying and what manufacturing purchase volumes look like. We speak to companies and learn how companies worry about working capital and cost reduction. And we’re sorry. Though the manufacturing patient has stabilized since the beginning of the year, so to speak, it’s too soon to say the patient is back to health.
In a follow-up post this afternoon, we’ll look at demand factors within some of the major industrial metals categories.