-- Andy Home is a Reuters columnist. The opinions expressed are
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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
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
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
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.
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
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)
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
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
Forget also any bi-polar split between a recovering,
infrastructure-led Chinese economy and a still-moribund European
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
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.