It’s now or never for the base metals.
No, that’s not your grumpy old bearish columnist talking, but the Danes. Christin Tuxen, senior analyst at Danske Bank, to be precise.
He doesn’t expect commodities to catch up with equities in the first half of 2012. So that's probably "never", then - but only for the next six months. After that, who knows?
And, overnight, those metal commodities showed every sign of not catching up, just as the Danes said.
Not for the first time in recent months, overnight we saw a severe divergence between the equities and the metals markets. The Dow finished up 129, gold fell $US29/oz and five out of the six base metals traded on the London Metal Exchange fell (lead closing unchanged). But with the Dow at 14,802 (and another all-time high) yet with copper struggling at $7575/t, it is an extremely patchy rebound.
And one patchy rebound that should be worrying the mining sector, faced as it is with rising costs. And not just here in Australia. The Financial Times reports this week that Chilean copper producers are facing a situation where runaway cost inflation is making new projects there uncompetitive.
The paper adds that “the boom mentality of the past decade - which led miners to overspend, workers to demand higher wages and service providers to increase prices - has eroded competitiveness just as the prices for the commodities they produce have fallen”
Any mining person reading this will be saying, “Tell me about it”
It’s all China’s fault, of course. As Danske argues, although China avoided a hard landing, its recovery has been less sturdy and less commodity-intensive than expected.
Commodities economist Ross Strachan, in an overnight note from Capital Economics in London, paints a less than rosy picture of China - and, especially, of likely demand for commodities.
And he comes back to a point that this writer has been making for some time: those manufacturing statistics, as in the PMIs, are all well and good in telling us something about industrial activity levels but, given that China has large stockpiles of many commodities, any up-tick in the China PMI really has limited implications for metals demand. (Strachan said iron ore was the rare exception to the stockpiles scenario.)
As Strachan points out, the March figures show China’s overall imports accelerated year-on-year, but commodity imports remained weak.
“In particular, we estimated that the year-on-year decline in the volume of commodity imports in the first quarter was the largest in eight years,” he said.
“In eight years” doesn’t sound too dramatic. But put that another way: it’s the biggest decline since 2005. Just think how much has happened since the first three months of 2005; back then we were just beginning to get a sense of the commodities boom taking off. Copper was around $3770/t and by October would break through the $4000/t level. Nickel finally reached $14,000/t after being stuck for many of the preceding years at under $10,000/t. Zinc closed on March 31, 2005, at $1382/t.
So we’ve come a long way, and so that eight-year record decline is actually very significant.
The value of China’s commodity imports in March was down 9.2% year-on-year - the eighth decline in the past nine months.
And it gets worse. Writes Strachan: “It is also worth noting that the current weakness in the volume of commodity imports comes at a time when prices globally are falling. Traditionally, Chinese traders have tended to buy on dips, but there is little sign of that behaviour now.”
And worse still. Copper imports are estimated by Capital to be down 30% year-on-year over the past four months. What’s more, Chinese copper exports have risen.
Capital sees the only bright spot being iron ore, which saw higher imports in March. However, that may be reflective more of the closure of domestic high-cost mines than an overall lift in demand.
Back to copper, and Danske Bank reckons the big story within industrial metals over the past few months has been the substantial improvement in the copper supply situation. Copper production has “excelled globally” driven by heavy increases in mine production, not least in China. The International Copper Study Group now projects a copper surplus for 2013.
Just another worry for the Chileans.
