27th October, 2014: 5:42 GMT
London (Commodities Now) - The 2014 special LME Week Supplement is available online. Having fallen once again in September, base metals price performance for the year is now down 1.65%. Weakness across the sector was driven by two main factors: strength in the dollar and Chinese growth concerns. We investigate here, together with the probable consequences going forward.
The dollar index posted its largest monthly gain in over two years in September (+3.85%), primarily due to weak eurozone inflation data which increased the likelihood of a further ECB stimulus. And comments made by Chinese Finance Minister Lou Jiwei that no change in economic policy would be imminent – despite recent economic indicators – has been fuelling concerns that China will not meet its full-year economic growth target of 7.5%.
The IMF too has revised down its global growth forecasts for 2014 and 2015, warning that the world economy may never return to the pace of expansion seen before the financial crisis. It now expects global growth to be 3.3% in 2014, with a pick-up in the rate of expansion to 3.8% forecast for 2015.
In related markets, the spot price of physical iron ore has continued to slide through, caught in a vicious downwards spiral of steel and raw materials prices. A fresh wave of iron ore supply and the resultant lower prices have encouraged China’s steelmakers to ramp up output, exacerbating oversupply in finished steel amid tepid demand from a struggling housing sector. Plunging steel prices in turn pressure mills’ cash flow and margins, prompting them to pull back from the iron ore market. Miners in Australia and elsewhere, which are now operating on tighter, if not negative margins, have also increased run-rates in a bid to lower their cost base, exacerbating oversupply.
The strength in the US dollar has changed the complexion of the global markets. After years of monetary policy easing, and as the end of tapering nears, the Fed might finally be ready to move and normalise its policy.
“So far this has had a clear impact on the FX space: on the back of higher US short-term rates and bear flattening of the US yield curve, we believe this upward trend should continue going forward. We note that far from being expensive, the US dollar is quite cheap on a trade-weighted basis,” according to Dr. Michael Haigh, Head of Commodities Research with Société Généralé.
“In base metals, we think that a combination of weak technicals, coupled with a growing deceleration in economic growth out of China will likely continue to pressure prices,” confirms Ed Meir at INTL FCStone. •
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