Commodities | Aug 08 2007
By Chris Shaw
As the sub-prime crisis in the US debt market causes highly leveraged traders to sell almost anything they can to cover their positions the impact has spread beyond just debt and equity markets, with base metals also being sold off in the rush to exit positions.
Barclays Capital questions whether the sell-off is in fact justified, noting global growth generally and Chinese economic growth in particular remains strong and with China having replaced the US as the world’s largest consumer of base metals.
This significance of China is clear as the group notes base metal consumption rose 5% year-on-year in the first half of the year, this at the same time as the US economy slowed and its consumption of metals declined accordingly.
But as Barclays points out, the impact of US buying in commodity markets remains important as even though it has fallen behind China in terms of overall consumption it is still a major player and its actions have an effect not only on the amounts of various metals being bought and consumed but on market sentiment as well.
Fortunately for fans of the base metal story the group’s view is the US economy won’t be too severely impacted by the sub-prime crisis, so it continues to expect a pick-up in industrial production in the second half of this year.
While there may be a lag this should flow through into higher consumption of metals and with stockpiles still at relatively low levels historically this should provide a boost to prices across the base metal spectrum.
Even if such a scenario takes a little longer to play out, the likelihood of ongoing strong demand from China should prove at least somewhat supportive for prices in the meantime in the group’s view.