Risk assets were expected to benefit from the liquidity unleashed first by the
European Central Bank (ECB), which promised to buy distressed sovereign debt
without any limits, and soon after by the US Federal Reserve, which said it
will buy $40 billion in bonds without setting a date for this programme to
end. Indeed, asset prices did move up as expected, but one asset class has
stumbled.
Commodities have shed their initial gains seen since the first week of
September, when the ECB first announced its bond-buying plan. The Thomson
Reuters Jefferies CRB Index, a broad indicator of commodity prices, has fallen
by 0.7% since then. That is in contrast to what's visible in the equities
space, where the MSCI Index for Asia Pacific ex-Japan is up by 7.2%, while the
MSCI World Index is up by 4.4% since the first week of September. Gold prices
have risen by 3.2% over the period.
Could commodity prices be reacting more to the bad news on the demand
front, as emerging economies are no longer the growth drivers they were in
previous years? China occupies the centre stage, as an economic slowdown is
forcing global companies to scale down their demand projections. Alcoa Inc.
lowered its growth forecast for China's aluminium consumption to 9% from 11%.
The previous forecast was announced in July.
Metals and fuels will bear the brunt of a slowdown in China. Indeed, LME
spot prices show the strain, with aluminium prices down by 1.6%, while zinc
prices are down by 0.5% since the first week of September. But copper is
telling a different story as it has risen by 5.1%, which puts a question mark
on whether the China impact is being overstated. But there may an explanation
for this.
The International Copper Study Group released its latest forecast for the
metal, in which it expects demand for copper to rise by 2.6% in 2012, but
production of refined copper is expected to grow by just 1.5% due to a
shortage of copper and maintenance shutdowns. A supply deficit may be putting
a floor under copper prices. But that situation may change in 2013, when
demand will slow down to 1.2%, but production may rise by 6%.
As for other metals, Alcoa cut its global demand forecast for aluminium
from 7% to 6%, and cut its deficit (supply less demand) forecast for the metal
by nearly half. Similarly, the International Lead and Zinc Study group, too,
recently released its forecasts for 2012 and 2013. Both metals are expected to
see an oversupply situation, as capacities that were planned during a boom
phase are coming up during a year of slowing growth.
Commodity prices may not have swelled up as much as equities did in the
aftermath of quantitative easing. But perhaps their decline may have been more
severe, if not for this liquidity support. The fact that commodity prices have
been contained will come as a relief to the Reserve Bank of India, which has
repeatedly worried that monetary easing in the West could feed inflation in
India.
Distributed by MCT Information Services
