That’s the question on metals buyer’s minds. Stock market prices have crashed not just on one day, but on consecutive days in a manner rarely seen in the last hundred years, driven by escalating levels of panic. As an FT article points out, miners, oil and gas companies and commodities traders have tumbled in some cases nearly 20 percent over the course of the week. Comparisons to the financial crisis of 2008 abound, of course, and some such as John Higgins, a senior markets economist at consultancy Capital Economics, have been quoted in the article as saying the last time that resources stocks and actual raw material prices diverged so much was in the summer of 2008, ahead of the start of the global financial crisis.
In 2008, “declines in the prices of commodity-related equities were a leading indicator of sharp falls in the prices of underlying commodities just a few months later, he said. “In other words, the prices of commodities were slow to react to the new reality. The suggestion here is that we could be seeing history repeat itself and the fall in stock prices is the forerunner of falls in metals and other commodities. So far, commodity falls have been modest in comparison. Brent crude is down 7.5 percent on the week, although with Brent and West Texas both close to technical levels, further falls could herald a significant drop. Copper is still above $9,000 per ton as we go to “press,” and iron ore prices even rose this week.
Like Oil and Copper
Ultimately though, metal and wider commodity prices are likely to depend on the extent of the economic slowdown, but as 2008/9 showed, any drop in prices could be relatively short-lived. Oil is a good example. The underlying fundamentals have not changed significantly, the price is being driven by the fear that demand will fall in an economic slowdown just as Saudi Arabia ramps up production, but OPEC production can be reduced as well as raised readily enough and lower oil prices anyway would support global growth just as higher oil prices have reined it back this year. Likewise, although China is slowing and will have to contain growth if inflation is to be controlled, it is still zipping along at 7 to 8 percent. The Chinese have been de-stocking on copper for some months and if the price falls below $9,000/ton and plateaus (i.e. doesn’t collapse as it did post-Lehman), the Chinese will likely be back in the market this year to re-stock, pushing the price back up again.
So which is more likely a repeat of 2008 where falling stock prices were a harbinger of falling metal prices? Or a bounce-back based on relatively stable fundamentals, a tight supply market and slower but still positive growth in Asia? Not wanting to get splinters from sitting on the fence, we think it quite possible we will get both. In the short-term, metal prices will fall further — but not as part of a longer-term bear market; more as a correction — before prices pick up again later in the year. The driver will be global growth, slow yet still positive, and prices will likely recover, but evidence of a US or European double dip will open the door to further falls.