By Stuart Burns
Those watching the copper and other non-ferrous metals falling sharply over recent weeks on the LME, yet simultaneously reading that steel prices are moving up in the US, steel production rising and iron ore prices remaining firm, could be excused for wondering what’s going on. As Andy Home explores in a recent Reuters article, market fundamentalists familiar with non-ferrous metals and iron ore will argue opposite opinions that one (either) metal group is showing the “real” market and the other is mistaken. Because surely it cannot be right that copper prices plummet on the expectation that demand is slumping, yet iron ore and steel prices rise on the expectation demand is increasing.
So, in fact, what we are seeing is largely a difference of perspective. With a robust futures market and slowing Chinese buying (recent weeks excepted), hedge funds and investors in the copper market are seeing a market with lower demand 12 months from now relative to today. Nevermind that there are structural supply-side problems for copper, demand is easing, the dollar is strengthening, and therefore “sell copper” is the overarching rule.
Iron ore and steel producers, however, are looking at steel growth in China and even in the US as robust.
Click charts to enlarge.
Global steel production dipped sharply in August to 124.59 million tons from 127.51 million tons in July, but that is a seasonal trend seen every year as the Northern Hemisphere goes on holiday and Asian mills often undertake maintenance.
The global rate of production growth is still 9.8 percent, with China pushing 13.8 percent in July, and the first 10 days of September exceeding the 700-million-ton annualized run rate. Supporting the view that US steel prices will rise, Reuters reported North American steel production remains robust. US production growth actually accelerated from 8.9 percent in July to 13.8 percent in August, matching that in China.
But the common theme running through all this data is that it’s looking in the rear-view mirror. Lacking a price-leading futures market, the ferrous metals market reacts more retrospectively than non-ferrous metals. Government can tinker around the edges, but particularly after the expenditure of every financial weapon in the Fed’s arsenal over the last three years, its ability to dramatically change the future is unfortunately very limited. We can be sure debt and banking worries will get worse before they get better — no one has the ability to make them otherwise.
Look no further than Europe to see what is happening when debt and banking worries begin to impact the real economy. Germany, France and other northern European economies, showing robust growth just 3-4 months ago, are now reporting negative manufacturing PMI figures. ArcelorMittal (MT), Europe’s largest steel maker, announced at the start of September it would shut down a blast furnace at its plant in Eisenhuettenstadt, Germany, and while others haven’t rushed to follow, they are all on watch to do so.
China is again diverging from the West. Asian growth remains positive, although HSBC and Markit Economics manufacturing index has shown negative growth in Chinese manufacturing for the third straight month, according to Bloomberg. The reading of 49.4 for September’s manufacturing index compares with a final reading of 49.9 for August and 49.3 for July, all below the break-even 50 level, suggesting contraction.
Long products production remains strong in China, driven by affordable housing construction projects, but with the economy slowing, how much longer will flat products continue to grow at +10 percent? Steel production does not exist in isolation from the rest of the economy. If Western economies stagnate or (worse) fall into temporary recession, steel production will be hit — as is already happening in Europe — and slowing demand in Asia should reduce seaborne iron ore shipments.
In the long term, there is a logical relationship between the metals consumption in an economy; they tend to all increase or all decrease, relatively speaking. If the markets are correct in seeing copper demand falling (and price falls are not just a function of a stronger dollar — non-ferrous prices are falling, euros, yen and pounds Sterling too, although not to the same extent as they appear to have done in dollars), then at some point steel demand growth must slow and also fall back, at which point price rises (for steel and iron ore) will be hard to justify, however disciplined mills and raw material producers are at managing capacity.