While the world worries about China, Europe worries about Greece and the UK worries about Osborne’s budget, today here at Money Morning we turn our heads to something more useful – industrial metals.
Although at the moment, judging by their price, there aren’t so many who want to use them.
We’re talking copper, zinc, and iron…
The commodity bear market is in its fifth year
The commodity bear market is now in its fifth year. Yet it seems like only yesterday that we were in a commodity supercycle.
Years of under-investment, a failure to make significant new discoveries, and insatiable Asian demand for raw materials meant that the price of any metal would just ‘go up’. Precious metal, industrial metal, rare earth metal – the market was indiscriminate.
It remains so – only in reverse. Name your metal; it’s up the proverbial creek.
Copper made new lows yesterday, lows not seen since the financial crisis of 2008. $2.40 per pound was the intraday low – $4.65 was the high back in early 2011.
Iron ore has descended beneath its 2008 nadir, and is now at eight-year lows, having fallen below $50 a tonne. $187 was the supercycle high.
Zinc is rather out of sync with the others. Having been $1.10 a pound few weeks ago, zinc fell below 90c a pound yesterday. But the five-year low is 80c. And zinc’s supercycle-high anticipated those of the other metals. It came in 2006, at close to $2 a pound. It didn’t enjoy the post-2008 bounce seen by other metals.
The companies that mine for these metals – BHP Billiton, Rio Tinto, and others – were all, as you would expect, completely hammered.
The sell-off in China is what is causing this latest rout, of course. There’s no telling, not by me at least, when that will end. But I suspect the implications for the global economy are rather more significant than those of Greek default, which is more political than anything else.
They call copper ‘Dr Copper’ – the metal with a PhD in economics. It’s supposed to be a good forecaster. Copper is used extensively in construction and industry, so people buying copper is a sign of economic growth – and people shunning it is a sign of contraction.
I’m not so sure about its record, but its current message, if you chose to heed it, is very clear: run away.
I’m going to give you price predictions now on these metals. Let’s revisit this in a few months and see if I got it right.
I can see a lot of support for copper in the $2.35-$2.40 area, but I’m going to look into my crystal ball and say that this area will not hold, and that we’ll go down to about $2.20-$2.25 before rallying to about $2.75-$2.80. That is an educated guess. Let’s see if I nail it.
Iron ore’s going to around $35 a tonne over the next 12 months.
Zinc – that’s only going to 80c. At which point it goes sideways and people lose interest altogether.
Who knows? Another five years or so and things might be so bad that we’ll get another commodity supercycle.
We are closer to the bottom than the top
The bottom line is that commodities – and, in particular, metals – are frustratingly cyclical. And the way the industry works – especially the way mining companies finance themselves – exacerbates it all. We got a boom, which leads to over production, hype, speculative excess and misinformation.
Then you get a bust. Everybody – except those that have been there before – loses their shirt. Then they lose several layers of skin as well. By the time it’s over, nobody ever wants to hear the words ‘mine’ or ‘metal’ again. There’s no investment, little production, shortfalls occur, the price starts rising and we’re just about ready for the next cycle to get going.
In terms of where we are in this cycle, I think most have lost their shirt and we’re a layer or two into the skin stage. But we need mines and metals to be completely shunned for a few years to the point of being forgotten, before the next cycle can start.
The way this market works makes you crave the government props that finance and housing both enjoy. Can you imagine? But I digress.
The elephant in the room with all of this is China. It had a huge stock market boom, followed by a huge correction. Is that correction going to morph into anything more significant?
Now there’s a question. But I don’t think so. I come back to zinc – Dr Zinc (I see it as a better forecaster than copper). It boomed and busted before all the others, now it trades sideways within a range.
There’s chronic under-investment, which will lead to a shortage of supply a few years. But every time it rallies, everyone gets over-optimistic, and every time it pulls back, everyone gets excessively negative. But, really, it doesn’t go anywhere.
I don’t think that’s such a bad metaphor for the global economy over the next 12 months – false dawns and false busts, when the underlying reality is sideways action.
• Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.
Category: Market updates