Posted by WARREN MOSLER on May 26th, 2009
I’ve also hear reports that pension funds have been adding to passive commodity strategies:
by David Robertson
May 25 (Business 24/7) — By the middle of this month, copper prices were 60 per cent up on the start of the year and platinum was up by a third. The rebound has been driven by a conviction that these metals were oversold and as construction demand (copper) and automotive demand (platinum) pick up, the price of the metals will return to more sensible levels. However, I bring bad news. Industrial demand is not returning nearly as fast as the London Metal Exchange or London Stock Exchange would have us believe â€“ and that means we are still some way off from seeing a return to the sort of growth levels achieved prior to 2008.
Two things are currently distorting metal prices: Chinese stockpiling and speculation. The Chinese have taken advantage of the low price of metals to fill their warehouses and this has been mistaken for a dramatic ramp up in “real” industrial demand. I have no doubt that Chinese demand from factories and construction companies has increased recently but at nothing like a rate that would support a 60 per cent surge in copper prices.
Speculation has also played a significant role in boosting prices as investors have piled into commodities, partly because they have been fooled by Chinese demand and partly because a lot of people are already thinking about where to stash their cash in the event of rampant inflation next year.
Last week Investec, the South African bank, highlighted the impact speculation was having on market-traded metals by focusing on commodities that are not easily traded. For example, ferrochrome, which is used to make stainless steel, actually fell 13 per cent in price between the first and second quarter of this year and it is off 63 per cent from its high at the end of last year. Manganese contract prices are off 70 per cent and the steel makers are pushing for a 45 per cent cut in iron ore contract prices.
There is no “hot money” in these commodities so they give us a better guide to real industrial demand â€“ and clearly there is little to get excited about yet. As a result, I expect to see a repeat of last year’s oil bubble: everyone will shortly wake up and realise that the shoots are not quite as green as had been hoped and prices will fall back by 20 to 30 per cent (again).