UNITED KINGDOM September 11 2015 9:35 AM
LONDON (Scrap Register): Correlations between metals prices were high ahead of the Great Financial Crisis (GFC) and in the immediate aftermath of it. Prior to the GFC, this was heavily influenced by exceptionally strong global economic growth and Chinese demand, which swept the quotations of most commodities higher, said Bank of America Merrill Lynch in a research note.
Meanwhile, immediately after the Global Financial Crisis, cross-asset correlations remained high partially because several governments implemented large fiscal stimulus packages and many central banks flooded the markets with liquidity.
Yet, more recently, individual metals have increasingly traded on their idiosyncratic fundamentals. This has been reflected in a sharp drop in correlations.
According to BofA Merrill Lynch, the decline in correlations highlights that fundamentals matter for the base metals. Aluminium for instance is now trading at the levels seen in 2001. In bank's view, this highlights that the metal is a capital-driven industry, i.e. access to funding determines production decisions and producers can raise/ decrease output at relative ease.
Meanwhile, the other metals tend to be more resource-driven, i.e. changes to output are less influenced by funding, but more by access to mines and ore bodies. In fact, the relatively slow rebalancing of the copper market is one reason the metal has so far traded well above average production costs, in contrast to aluminium, where almost half of the industry has negative margins.
“The global economy lacks an immediate driver that could boost global growth and metals demand across the board. This suggests that the mined commodities may continue to trade on their idiosyncratic fundamentals,” said the analysts at BofA Merrill Lynch.
As China's rebalancing continues, metals will likely track normal business cycles, but they are in need of a new structural growth driver. Yet, given aluminium is a capital driven industry, it will in bank's view remain the long-term underperformer in the metals complex even in upturns.