China decoupling pushes base metals prices higher

Base metals prices have appreciated strongly on signs of a steady pickup in industrial activity in China in the first quarter of 2009 and further evidence that the U.S. economic recession is reaching a trough. China had the biggest influence on global commodity markets in the boom years this past decade, but it alone does not have the horsepower to drive commodity markets appreciably higher on its own. Without a global economic recovery, metals prices are at risk to a fall.

Economic decoupling came late but it has arrived. Industrial production is rising in China after a very weak fourth quarter of economic growth in 2008. World steel and copper demand collapsed in the fourth quarter of 2008 according to Macquarie research; however demand in China has turned decisively higher in January 2009.

The data provides evidence that government stimulus measures in China are having the desired effect on the economy. However, they are insufficient to arrest the decline in global demand for industrial materials. Demand for steel from China increased 7.4% in the first quarter of 2009 over the previous year, but world demand declined by 23.5% according to Macquarie Research (world demand excluding China fell 37%).

Stocks of aluminum, copper, lead nickel, tin, and zinc are higher today than at the end of 2008. The 50% plus rise in copper prices since the start of the year suggests that prices are moving too far, too fast.

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