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Global Metals Weekly
Industrial metals and gold diverge on China and Europe
Global Commodity Research
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Base metal sell off, while gold hits a record high
Price movements of industrial metals and gold have diverged during the past few weeks. As the sovereign debt crisis in Europe unfolded, gold denominated in a host of currencies hit a series of record highs. Meanwhile, despite continued healthy data from the global manufacturing sector, industrial metals declined partially because of concerns over the strength of the economic recovery on bearish news flow from Europe and Greece. We noted the risk of a correction in the Global Metals Weekly, 26 April 2010.
Concerns about China's property sector and LGFVs
Industrial metals were hit by the announcement of measures aimed at cooling China's property sector. The policies implemented by the Chinese authorities could in the next few months lead to a slowdown of activity in the housing sector, with a knock-on impact on metals demand, as first noted in our Global Metals Weekly, 01 February 2010. However, we believe that it is not in the interest of the government to cause a collapse in the housing market. Local government funding vehicles are for instance heavily exposed to the property sector.
A localised European problem turned global
Apprehension over a slowdown of Chinese metals demand has been exacerbated by concerns over Southern European sovereign debt. An initially localised problem morphed into a global issue, reflected in rising CDS spreads of banks and declining global equity markets. Acknowledging that the uncertainty in Greece poses risks to the economy, policy makers have swung into action. The announced measures should help to support sovereigns with a shaky fiscal backdrop. However, given that most of the underlying structural issues in the Eurozone remain unresolved, markets have viewed the package with caution, highlighted by continued declines in metal prices.
We remain cautious on base metals
Considering the uncertainty over China and Europe, we remain cautious on the base metals especially in 3Q and we believe that prices could fall further from here. Market participants will in our view focus on a set of data points in the coming weeks, including the following: the extent to which tightening in China slows the economy, concrete announcements of measures by Eurozone governments that structural issues will be tackled and signs that the problems in Europe do not spread further. The current uncertainty over the fiscal situation in Europe reinforces our medium-term view that gold could rise above $1,500/oz.
