Below are some of the versions we read about recently on the reasons behind the relentless price increase of commodities.
VERSION 1: Speculators
In the current global economic slowdown, it would be fundamentally reasonable to assume that consumption has gone down and prices have weakened. This indeed is the case for lead, zinc and nickel. Copper on the other hand has remained stubbornly resilient and is in striking distance of its previous all-time high despite the increasingly bearish fundamentals. The International Copper Study Group (ICSG) reported a production shortfall for 2007 of about 55,000 tonnes, which is the basis of the widely published conclusion that copper remains "tight". However, the ICSG also states that those numbers make the assumption that all copper imported into China was consumed (Chinese consumption would have had to have been up 37%).
To find out what was actually happening statistically in China, one would look at the National Statistical Bureau (NSB) numbers to see what was produced plus what was imported, and subtract what was consumed. Consumption (3,990,000 tonnes) Production 3,441,000 tonnes Net Imports 1,350,000 tonnes Surplus Balance 801,000 tonnes In 2007 world refined copper production substantially exceeded consumption, by at least 750,000 tonnes. The inventory overhang in China has caused its prices to be at a substantial discount to the rest of the world. In the first quarter of this year, the ICSG has reported that global consumption is down by nearly 1%. First-quarter average mine capacity utilisation was slashed to 82% from 89% in the corresponding period of 2007. This is a fundamental picture of slowing consumption, unreported copper inventories and producers reducing production in face of worsening consumption. In short, it is unrealistic for copper price to be trading at such a high level. Actions of the speculators maybe one of the main contributing factors.
VERSION 2: Demand increase
Unlike in the past, when rallies in commodity prices have tended to be confined to a select few commodities, over 2003‐2007 prices have risen for all raw materials across the board. Links between various commodities through the supply chain (including, for example, transport costs) typically result in positive co‐movements but correlation is at a historical high, pointing to the role of a common demand shock across the raw‐materials sector.
The remarkable rise in oil and metals prices has its origin chiefly in the strength of emerging markets demand this decade. The rally in metals prices has also been driven by the concurrence of strong demand growth from the developing world and weak production capacity. China, which consumed about half of all the increase in copper, steel and aluminium output, and nearly all the increase in lead, zinc and tin during 2002‐2005, has single‐handedly altered the demand side of the equation.
The demand for base metals began to rise at a juncture when supply was ill-positioned to respond, since investment had sunk to a 12‐year low in 2002, due to a steep decline in prices in the 1990s, and a wave of consolidation at the end of that decade caused exploration budgets to shrink.
Comments:
Depending on what you read and who you listen to, the above are 2 of the most popular reasons given for this surge in prices of commodities. In my opinion, both are valid factors behind the price increase. It is clear that as China and India progress, their need for commodities will go up. At the same time, the number of speculators and hedge funds having open interest in various commodities also went up in recent years. However, in the near term, it is unlikely that commodity prices will remain immune to the global economic slowdown that is underway.
A weakening US economy, coupled with the forecast slowdown in Chinese growth, which Fitch estimates will be the slowest in six years, is likely to take a further toll on metals demand.
On the other hand, US House of Representatives recently passed a bill that directs the Commodity Futures Trading Commission to use all its authority to curb speculation in energy futures markets. It seems like the stage is set for a period of stable prices.
VERSION 1: Speculators
In the current global economic slowdown, it would be fundamentally reasonable to assume that consumption has gone down and prices have weakened. This indeed is the case for lead, zinc and nickel. Copper on the other hand has remained stubbornly resilient and is in striking distance of its previous all-time high despite the increasingly bearish fundamentals. The International Copper Study Group (ICSG) reported a production shortfall for 2007 of about 55,000 tonnes, which is the basis of the widely published conclusion that copper remains "tight". However, the ICSG also states that those numbers make the assumption that all copper imported into China was consumed (Chinese consumption would have had to have been up 37%).
To find out what was actually happening statistically in China, one would look at the National Statistical Bureau (NSB) numbers to see what was produced plus what was imported, and subtract what was consumed. Consumption (3,990,000 tonnes) Production 3,441,000 tonnes Net Imports 1,350,000 tonnes Surplus Balance 801,000 tonnes In 2007 world refined copper production substantially exceeded consumption, by at least 750,000 tonnes. The inventory overhang in China has caused its prices to be at a substantial discount to the rest of the world. In the first quarter of this year, the ICSG has reported that global consumption is down by nearly 1%. First-quarter average mine capacity utilisation was slashed to 82% from 89% in the corresponding period of 2007. This is a fundamental picture of slowing consumption, unreported copper inventories and producers reducing production in face of worsening consumption. In short, it is unrealistic for copper price to be trading at such a high level. Actions of the speculators maybe one of the main contributing factors.
VERSION 2: Demand increase
Unlike in the past, when rallies in commodity prices have tended to be confined to a select few commodities, over 2003‐2007 prices have risen for all raw materials across the board. Links between various commodities through the supply chain (including, for example, transport costs) typically result in positive co‐movements but correlation is at a historical high, pointing to the role of a common demand shock across the raw‐materials sector.
The remarkable rise in oil and metals prices has its origin chiefly in the strength of emerging markets demand this decade. The rally in metals prices has also been driven by the concurrence of strong demand growth from the developing world and weak production capacity. China, which consumed about half of all the increase in copper, steel and aluminium output, and nearly all the increase in lead, zinc and tin during 2002‐2005, has single‐handedly altered the demand side of the equation.
The demand for base metals began to rise at a juncture when supply was ill-positioned to respond, since investment had sunk to a 12‐year low in 2002, due to a steep decline in prices in the 1990s, and a wave of consolidation at the end of that decade caused exploration budgets to shrink.
Comments:
Depending on what you read and who you listen to, the above are 2 of the most popular reasons given for this surge in prices of commodities. In my opinion, both are valid factors behind the price increase. It is clear that as China and India progress, their need for commodities will go up. At the same time, the number of speculators and hedge funds having open interest in various commodities also went up in recent years. However, in the near term, it is unlikely that commodity prices will remain immune to the global economic slowdown that is underway.
A weakening US economy, coupled with the forecast slowdown in Chinese growth, which Fitch estimates will be the slowest in six years, is likely to take a further toll on metals demand.
On the other hand, US House of Representatives recently passed a bill that directs the Commodity Futures Trading Commission to use all its authority to curb speculation in energy futures markets. It seems like the stage is set for a period of stable prices.
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