www.unuudur.com » Copper in supply deficit for fifth successive year

Copper in supply deficit for fifth successive year

[Нийтэлсэн: 15:55 21.10.2014 ]


Is deflation looming? Or are the commodity markets warning of a major economic crash ahead? If one follows them one of these scenarios (or a combination of both) is looking very much on the cards. Take copper, renowned as a global industrial bellwether, for example. According to the latest estimates from the International Copper Study Group (ICSG), slowdowns in new copper projects and expansions taken together with better demand levels than anticipated, notably from China, suggest that copper supply is likely to be in deficit to the tune of 307,000 tonnes in 2014 – which, if accurate, would make it the fifth year in a row that demand has exceeded supply. Yet copper prices are at around the lowest levels for over four years thus contradicting the usual laws of supply and demand.

The ICSG figures are perhaps all the more remarkable in that earlier in the year it, along with most base metals market analysts, were predicting a fairly substantial copper surplus of some 405,000 tonnes this year, although it has to be said that the recent history of copper market forecasting has tended to follow a similar pattern with supply seldom reaching figures predicted early in the year, and consumption often exceeding it. In mining things seldom go entirely smoothly with all kinds of factors cropping up which can lead to projected targets not being reached – through technological, geological, meteorological, political and labour issues which might not be apparent when forecasts are initially made. Even though analysts may allow for these they seldom seem to allow enough!

Nevertheless the ICSG is already predicting a copper surplus arising in 2015, although at 200,000 tonnes this has already been downgraded from an estimated surplus of 393,000 tonnes made only six months ago. The body sees production growth at around 4% next year but demand only rising perhaps 1% due to a continuing slowdown in global economic growth despite many politicians and economic forecasters telling us that the recession is over and the only way is up!

In remarking on the latest ICSG figures, analysts at Germany’s Commerzbank, one of the best commentators on commodity markets, reckons that the 2015 forecast suggests this is likely to preclude any significant rise in copper prices in the medium term. That said, the bank also notes, the ICSG has tended to be overly optimistic in its appraisal of the market balance in recent years.

But does what has been happening in copper apply to the other base metals? To a greater or lesser extent yes! All are trading only at around the same price levels seen four or five years ago – even supposedly high flying zinc. True some of these have crashed right down in the interim – like aluminium, nickel and zinc – but have since recovered to their current levels, and in the ever more short term viewpoints of many market analysts this performance is seen as highly positive. Short term supply/demand dynamics have thus perhaps led to price fluctuations. But given that all these base metals may well be off their low points but still have shown no real price improvement over a four or five-year period, while there has been some inflation and currency value deterioration over the same period, their true prices have to be rated as even lower still.

Taking the copper market in particular, something just doesn’t gel here. Deficits should generate higher prices, not lower ones – so either the statisticians are all wrong in their estimates, or perhaps the markets are telling us we have already effectively been in at least a disinflationary period for the past five years or so. Negative interest rates tell much the same story. OK, national GDPs are mostly still growing, although at an abysmally low rate in most Western nations, but this too is almost certainly not keeping up with currency buying power declines. And now, there is the seemingly increasing likelihood that the U.S. Fed will keep interest rates at their current low levels for much longer than previously envisaged and may even have to revert to more Quantitative Easing if the markets take another dive lower thus reducing the consumer confidence on which the whole financial house of cards is built.

I’m not an economist – as is probably apparent from my reading of the metal statistics and what I feel they may mean for the global economy. But with the Eurozone, including even usually high flying Germany seeing virtually zero, or even negative, growth at the moment, Japan likewise, China slipping and the strength of any recovery in the U.S. open to question, given massaged government statistics over the years, we could be facing years of flat, or possibly declining, prices. That’s deflation as I understand it, regardless of whether governments can point to fractional growth figures to try and retain consumer confidence.

Deflation may be good for the consumer on paper, but longer term it leads to declining wealth, lower industrial output, falling wages, less jobs etc. Maybe we’re not there yet, but only in a period of exceptionally low inflation (disinflation) but real deflation, a very rare economic occurrence, may not be far away and continuing low metal prices across the board could be a serious warning sign.

The moneycrashers.com website notes that one of the key causes of deflation is a change in structure of capital markets – notably through easier access to debt and equity markets, which can be used to fund new businesses or improve productivity. Reasons why companies may have an easier time raising capital include declining interest rates (we have negative interest rates already), changing banking policies (QE is a great example of money availability for companies being made easier, if indirectly), a change in investors’ aversion to risk (see the big rises in stock markets over the past few years). However, after companies have utilized this new capital to increase productivity, and if consumer spending doesn’t rise in parallel (as it doesn’t seem to be doing at the moment) they are going to have to reduce their prices to reflect increased supply of products with too much product chasing too little consumption.

While not the case as yet in the U.S., government imposed austerity measures may also contribute to deflation. This is already happening in the Eurozone. This is usually accompanied by a reduction in money supply although QE policies are designed to thwart this (but can have other adverse effects – see above).

If real deflation does set in it leads to a continuing downwards spiral which is extremely hard to bring under control. It results in a fall in consumer confidence and should this lead to a fall in spending (which it will) corporate profits will fall and companies will have to cut wages or lay off staff to compensate, which reduces confidence and spending yet further. Businesses will also have to reduce their own purchases – and so the downwards spiral continues.

We may not quite be in this situation yet, but with so many deflation cause boxes being ticked, flat to declining metal commodity markets may just be yet another sign of the direction in which many economies are headed.

Author: Lawrence Williams


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