(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Nov 7 (Reuters) - Cautiously optimistic. That was the consensus takeaway of the mood at LME Week, the annual shindig of the industrial metals markets.
Looking at the screens this morning, you could well drop the word “cautiously”.
The LME metals are on a tear. Zinc and tin have both recorded year-to-date highs, nickel is close to doing so and even out-of-favour copper has hit its highest level since March.
True, this may be down in large part to the Trump effect. The U.S. elections were a hot topic last week, with analysts near unanimous in their view that a Donald Trump win trading strategy would be to buy gold and sell everything else.
So, with Hilary Clinton getting a weekend poll boost after the FBI cleared her of wrongdoing over emails, this morning’s exuberance may be the flip side of that trade. Gold, it is worth noting, has fallen.
But beyond the U.S. political noise, there was a feeling that the cycle low may have passed for the industrial metals complex.
China’s early-year stimulus has been the big “bull” surprise of 2016 and the tail winds are expected to carry through to next year.
There is also a hopeful sense that Western investment money is starting to flow again into commodities, joined this time around by Chinese money.
Hey, and even if neither funds nor fundamentals are looking that great, there is always the reliable fallback of divergence between individual metals to generate a little bit of trading excitement.
Graphic on LME Index: tmsnrt.rs/2fTAsF4
IT‘S STILL ALL ABOUT CHINA
Global growth is expected to accelerate to 2.7 percent next year from 2.2 percent this year, according to Grant Colquhoun, group economist at the CRU research house.
It will be, he pointed out, the first acceleration since 2014 but, and it’s an important but, “we’re still stuck in a slow-growth world”.
So it’s all down to China. Again.
The stimulus unleashed at the start of this year does, in hindsight, appear to have coincided with the low point of the LME base metals index in January.
Renewed economic pump-priming into infrastructure and construction has, once again, turned metals demand expectations on their head.
First-stage beneficiaries have been steel, iron ore and met coal. The flow-through effects on second-stage metals such as copper are still being felt.
And the broad view is that the stimulus tail winds will only abate around the middle of next year.
After that, most analysts get a bit nervous.
“China is not out of the woods and I think real estate will start to soften in Q2 and we could see lower prices in H2,” was the view of Ed Meir of INTL FCStone.
“Storm clouds are gathering” for 2018 agreed Jim Lennon, consultant at Macquarie Bank.
“The further out you go, the more concerned you’ve got to be” was the take of Goldman Sachs’ Max Layton, talking specifically about Chinese copper demand.
While the wheels of global economic growth still grind slowly, a different sort of cycle appears to have passed an inflection point.
After several years of absence the heavy fund hitters are coming back to town.
Barclays Capital estimates that $62.3 billion of investment flowed into commodities in the first nine months of this year, exceeding the previous equivalent high seen in 2009.(“The Commodity Investor - Flow Analysis”, Oct 21, 2016)
Most of it has hit the precious and oil markets in that order. But in September itself over 80 percent of flows, or around $9.5 billion, went into broad-based commodity indices with a resulting trickle-down effect on base metals.
Outright price gains, a break-down in correlations between commodities and other parts of the financial universe and inflation hedging are all in the mix.
Paul Crone, founder of Critine Capital and speaking on the “Investors in Metals” panel at the LME Seminar on Monday, agreed.
“Investor interest appears to be turning”, particularly in the form of indices “as a long play”, Crone said, although he added the caveat that heavyweight funds are increasingly looking for personalised investment baskets.
Chinese money is also on the move in the commodities space, according to Li Gang, co-head of market development at Hong Kong Exchanges and Clearing, speaking on the LME’s afternoon Chinese seminar.
Thwarted by the authorities’ clamp down on stock market trading and frustrated by the red-hot property markets in Tier 1 cities, many retail and not-so-retail investors are now looking for a return in commodities, he argued.
Love them or hate them, and opinion is equally divided in the metal markets, fund money has a track record of being ahead of the curve when it comes to spotting inflection points.
Its return has, therefore, been taken as another positive sign the worst might be over.
Graphic on relative base metals price performance 2016:
Divergence between individual metals has been an overarching theme this year and looks likely to continue.
Supply has been the key differentiator in 2016, with metals such as zinc benefiting from raw materials famine and others, particularly copper, struggling to cope with feast.
Everyone agrees that zinc’s fortunes are beholden to Glencore, which suspended 500,000 tonnes of mine capacity this time last year. No-one agrees, however, on when it will reverse those cuts.
Nickel’s fortunes depend largely on the Philippines, where the new administration has suspended several nickel mines and threatened more with closure.
But given how low the nickel price has traded this year, many will agree with Anton Berlin, marketing manager at Norilsk Nickel, who told Bloomberg’s Wednesday seminar that “there is only one way to go, up, it’s just a question of when”.
Aluminium, according to Jorge Vasquez, founder of Harbor Aluminum, will suffer from a rising surplus, record high stocks and the increasing forced release of those stocks as financing metrics become strained. Nobody rushed to contradict him when he expressed that view at the LME seminar.
And as for copper, opinion remains as polarised as ever with Goldman’s Layton and Citi’s David Wilson doing bear-bull battle during the Bloomberg seminar.
A more unusual take on divergence was provided by Vanessa Davidson, director of copper at CRU, who argued that demand prospects for individual metals were also potential drivers of divergence.
The lightweighting of vehicles has already benefited aluminium over other materials and creeping electrification of the global automotive fleet will boost both copper and lead, the latter thanks to stop-start engine technology.
Zinc, by contrast, risks demand destruction if raw materials constraint feeds through to ever higher prices with die-casting and construction both at-risk sectors.
CRU’s conclusion was that intensity of use becomes a key source of divergence in a slow-growth global economy.
But then a more divergent commodity market, according to CRU director Paul Robinson, “is good for institutions seeking portfolio diversification.”
In other words, thank heavens the funds are back!
And many thanks to the LME, Metal Bulletin, Mitsui Commodities, Triland Metals, CRU Group and Bloomberg for their hospitality last week.
Editing by Louise Heavens