Towards the end of October, ArcelorMittal reported a weak third quarter and forecast a bleak fourth quarter. A little more than a fortnight later, the world’s largest steel maker is preparing for a price increase to the tune of ¤75 across December and January deliveries of select products. The US Federal Reserve’s announcement of a second round of quantitative easing, or QE2, in the first week of the month explains the disconnect. True enough, rate rise fears in China have pulled down commodities to an extent, but there still has been quite a run.
Across the ferrous and non-ferrous spectrum, commodities have moved up significantly in the last few months. Copper, which has seen the biggest surge, is the first metal to move back to the pre-economic crisis levels.
During June-July 2008, at the peak of the commodity cycle, copper was at $7,800-$8,500 a tonne. Yesterday, even after the decline, it was at $8,355 a tonne, down from the $8,700 level seen five days ago.
Aluminium, at the $2,400 level, is at a six-month high, and so is iron ore at $166. Steel, if the companies pass on the rate rise in December and January, will be back at the September levels of $600 a tonne.
“We believe QE2 will be a game changer for commodities. It means strong international capital flows will reinforce the already powerful domestic creation in emerging markets (EMs). That should flow through to robust commodity-intensive growth in EMs while the developed world struggles in the face of higher commodity prices,” said a UBS report.
But thermal coal, of which India is the fastest-growing importer, continues to be linked to China, which is the largest consumer and producer of the fuel. Barclay’s London-based analyst Amrita Sen says QE2 has dispelled doubts about demand recovery being unsustainable on the basis that it is linked to stimulus packages. “This just goes to show that growth is more important than inflation. There is demand in China as well as Europe, but supply-side constraints are continuing,” Sen added.
Both South Africa and Australia are facing infrastructure problems. Supplies from the former are increasingly being diverted from Europe to Asia. Solid demand from China and India — in combination with additional supply-side issues in Colombia and Russia (both of which supply to Europe) — would support thermal coal prices near $100 per tonne, said Sen.
However, there are concerns that QE2 may lead to a commodity bubble. But Hindustan Copper Chairman and Managing Director Shakeel Ahmed believes the real demand has kicked in.
“The surge in copper is a combination of real demand due to QE2. Last year, despite inventory build-up, prices went up, so there was a fair amount of speculation. The inventory level is down this year. It’s more of a demand surge in China, coupled with an improvement in the fundamentals of the US market. Four months ago, excess supply was forecast. It stands revised at a global deficit of 200,000 tonnes.”
Steel prices are being led by inputs such as scrap and iron ore. “Commodities are seeing a cost push. Prices of most inputs have been rising. Therefore, there has been a general increase in all commodities. The US economy is now stable and we should see some positive signs. Steel is moving within the $30-35 band. The outlook will, however, depend on what the European producers do. If they maintain production at a level that there is a demand-supply match, prices will increase,” said Essar group Director Jatinder Mehra.
The scenario changed quite dramatically after QE2. Friday’s rate rise in China may sway things in the opposite direction. But analysts believe, as long as China sticks to its new-found theme of “develop and urbanise inwards”, the commodity basket will remain protected.
