Tracking Metals Markets Look at China, ETFs and Trade Buying

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There is nothing like giving a speech entitled, Non-Ferrous and Ferrous Q4 Price Trends and Beyond, to force one to summarize the macro-trends affecting the marketplace. It’s one thing to write posts on various price trends for individual metals such as titanium, copper or steel. It’s another to look at them collectively and say, what can we say about all of them? By going through such speech writing exercises we probably don’t offer anything shocking in terms of conclusions, yet it has helped us to articulate a few thoughts and insights that we thought we’d share with readers if for nothing else, then to hear your reaction.

The first and probably biggest a ha as we used to call them in consulting relates to this point ” looking at US supply and demand trends is no longer sufficient when trying to understand what is happening within various metals markets. Look no further than China to understand that one country’s stockpiling during the first half of this year undoubtedly led to some of the increase in base metal prices. The story about where metals have been and where they will go simply can not be told without deeply understanding the macro-economic environment and metals price trends within China.

But perhaps a more telling point, though also closely aligned with the first point regarding the importance of examining the fundamentals, activities and macroeconomic environment in China is the amount of money being poured into ETF’s, which are made up of base metals (heavily weighted toward copper). Any little nugget of positive growth for anything in China equates to some interesting returns for industrial metal ETFs. ETF’s play a big role in metals prices. We’ll do some digging to show the actual dollars invested in ETF’s in 2009 as a separate post.

Other factors certainly influence prices ” currency exchange rates, interest rates and of course actual demand. Oil prices, commodity input costs such as coking coal and iron ore are correlated with aluminum and steel prices respectively. But this doesn’t come as a surprise to anyone. We’ll write some follow-up pieces on the outlook for metals prices for Q4 later this month.

One other conclusion worth noting – commodity volatility does not seem to have eased with this recession.   Likewise sourcing strategies also require frequent review.

–Lisa Reisman

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