-- Andy Home is a Reuters columnist. The opinions expressed are his own. For more Metals Insider columns, top Reuters metals stories and third party content, please visit the free Base Metals Community website at ((www.metalsinsider.com)) --
By Andy Home
LONDON, April 14 Something very strange is happening in the industrial metals complex. Price performance between component metals is becoming increasingly divergent, generating wildly different signals about the state of the global economy.
At one end of the spectrum lies copper. This, remember, is the LME's "bellwether contract", so called because of its multiple end-uses, which should make it the "true" gauge of global manufacturing activity.
The red metal is on a surge. LME three-month metal last week jumped another $258 per tonne, or 6.0 per cent, as of its Thursday close at $4,559. It was the fourth straight weekly rise, bringing the year-to-date increase to a staggering 48.5 percent.
At the other end of the spectrum lies the fledgling Mediterranean steel billet contract with a year-to-date price decline of 19.7 percent. True, the LME's two steel futures are still dwarfed by copper in terms of volume and open interest but there is plenty of supporting evidence to argue that the Med steel price is also a "true" reflection of the wider economy.
Which metal is generating the "correct" signal? Actually both are, but only if it is understood copper and steel prices are signalling different things.
A PROBLEMATIC BELLWETHER
The current market discourse has multiple justifications for copper's stellar price performance so far this year, including rallying stock markets, rising risk appetite, concern about future inflation and a big long-term question-mark about the U.S. dollar.
But these are half-explanations. Strip them away and we're left with one glaringly obvious fact, the flood (there is no other word to describe it) of metal into China.
The preliminary March import figures released yesterday showed that the surge reached a new peak last month of 375,000 tonnes. Included in that snapshot figure is a likely 300,000 tonnes of refined cathode imports alone.
China's voracious appetite for copper units has directly impacted the LME. With the arbitrage window wide open (and still so) increasingly large quantities of LME-registered metal are moving to China.
LME stocks have already fallen by over 50,000 tonnes since their February peak and ever more metal is moving into the cancelled warrant "departure lounge." Falling LME inventory and expectations of more declines to come have spooked the remaining bears in the London market. It is their short-covering that has been the primary driver of London's supercharged price rise.
Rather than being a reflection of the broader global manufacturing sector, therefore, copper's near 50 percent price rise is a function purely of demand from one country, China.
That is not in itself overly controversial given China's undisputed role as the engine of global copper consumption growth in recent years.
The real problem is that the buying frenzy is not even reflective of manufacturing activity in China. Apparent Chinese consumption, defined as domestic production plus/minus changes to Shanghai stocks plus net imports, was 44 percent in February. [ID:nHKG169023]
With imports rising still further in March, apparent consumption will be higher still. Even the most bullish of copper bulls know that actual end-use in China is running nowhere close to that figure.
Nor, realistically, will it do so any time soon, notwithstanding the much-anticipated infrastructure boost included in Beijing's stimulus package. The stimulus to domestic demand will at best offset the collapse in exports of manufactured goods.
In other words, "bellwether" copper is telling us only that China is still strategically short of copper and that the country, at both commercial and government level, is gorging itself at a time of (relatively) low prices and (relatively) plentiful supply.
What it is not doing is painting an accurate picture of global manufacturing, which is in a recession shaping up to be the worst since the 1930s.
A NEW BELLWETHER?
That's what the LME steel contracts are signalling. Sceptics can argue that the LME steel contracts, particularly the somnolent Far East one, are still too illiquid to be a true reflection of anything.
That would be a fair criticism were it not for a host of complementary signals. Nickel, for example, is the LME base metal most attuned to the fortunes of the steel sector via its use in stainless steel. Even with its own mini-surge of the last two weeks, three-month nickel was still down by 5.6 percent on the start of the year as of Thursday's close.
Or look beyond the LME to see what is happening in the broader steel market. German steel production fell by 50 percent in March from year-earlier levels.
Such a dramatic slump in production may still not be enough to rebalance supply with evaporated demand.
The world's largest steel producer ArcelorMittal said last week it is extending its production cuts into the second quarter. Why?
Because, in the words of board member Michel Wurth, "what we see today is that the reduction in real consumption in Europe is so strong that the reduction of stocks has not materialised as anticipated." [ID:nL8642307]
Forget also any bi-polar split between a recovering, infrastructure-led Chinese economy and a still-moribund European one.
Chinese steel production, which should get an even bigger boost from the country's stimulus programme than copper, also fell in March, according to figures from the China Iron and Steel Association. [ID:nSHA322655]
After raising production in January and February, Chinese steel makers shifted back down a gear in March in response to domestic price weakness and slack export demand. Exports of steel product in March were down by almost 60 percent from a year earlier. [ID:nPEK8539]
The steel market, which is the biggest metal market by volume, is in recession. The copper market isn't thanks only to Chinese stockpiling.
Which is why those LME steel contracts, minnows though they undoubtedly are, may be acting as a far more accurate "bellwether" of the world out there than copper right now.