An article in Reuters last week makes worthwhile reading despite (or maybe because of) the disturbingly negative view the author holds for the copper market next year. Some feel Simon Hunt is to the metals markets what Nouriel Roubini is to the financial markets — a perennial bear, but if that’s the case, they are both bears who have been proved right on many occasions in the past and their views deserve careful analysis.
Hunt led his analysis with a look at a couple of the leading indicators to gauge a measure of growth trends. Of the August 2011 OECD Composite Leading Indicators (CLIs), the Euro Area, five major Asian economies (excluding Japan), China, Brazil and India are all below the threshold 100.0, “pointing strongly to a slowdown in economic activity below long term trend.”
Germany is close to that threshold; Canada and the UK are below it this doesn’t mean outright recession, just slowing growth, but in many cases slowing from an already glacial pace. For the US, the ECRI (which correctly forecast the beginning and end of the last recession and has predicted all of its recession calls correctly while issuing no false alarms over the past 15 years) states: “If the USA isn’t already in a recession now it is about to enter one.”
Quoting Professor Kenneth Rogoff in an interview with Der Spiegel, the article suggests we have been mistreating this crisis as a conventional recession when in fact it’s a contraction of the sort only seen once every 75 years. In his view, this is why Europe’s crisis, which began as a crisis of confidence, turned into a debt and liquidity crisis and finally led to multiple solvency crises, is not ending: “No amount of handouts will be enough to jump-start growth once; it’s the wrong diagnosis. We have a solvency crisis and we have European countries and regions that are fundamentally bankrupt. No loan in the world, no matter how big, will save Greece, nor will it save Portugal and probably not Ireland, either. Recent agreements in Brussels among the EU countries have encouraged the markets, but Simon Hunt suggests these bailouts will simply postpone the crunch that should come in 2011 to 2012, by which time even more will be at stake and the result will be worse.
China will not come riding to the rescue of metals markets this time around; they simply can’t. Beijing has had to step in this month and buy shares in most of the major Chinese banks to bolster investor sentiment following a dramatic slide in their share price. Yes, social housing will continue, and no, China will not go into recession, but nor will there be a stimulus-inspired buying spree of industrial metals. Credit is too tight and end-user demand is slackening.
Copper is seen by Hunt, as by so many in the industry, as a bellwether of industrial metal demand. That bellwether has held up relatively well at $6,800 per ton these last few weeks, but if the European sovereign debt crisis is not resolved and politicians’ promises are seen to be less than what the market perceives as required, Hunt suggests copper could be 10 percent lower by year-end. Let’s see, he called the current price correctly — he could yet be right again.