‘Dr Copper’ predicts recovery in world economy

“Dr Copper” is in town. And he has given the global economy a clean bill of health.

The mood at LME Week, which sees as many as 10,000 miners, smelters and traders descend on London, offers an unrivalled barometer of the state of the global economy: the wide range of uses of industrial metals across manufacturing and heavy industry mean that metals traders are often the first to witness shifts in the economy.

At the seminars, meetings and cocktail parties this year, one message has been clear: whisper it quietly, but after years of lurching from one crisis to another, the world economy appears to be on a more stable footing.

“We’ve seen a very healthy growth in demand in China, exceeding expectations. We’re witnessing a modest recovery in the US. And in the case of Europe, we believe that there are signs that we have reached the bottom of the market,” Thomas Keller, chief executive of Codelco, the world’s largest copper producer, told the FT.

The message, repeated by executives and traders across LME Week, marks a rare moment of optimism in the metals industry in the past two years. If the metal traders’ confidence is correct, it bodes well for cyclical sectors and asset classes beyond commodity markets.

Metal markets have been buffeted by several waves of eurozone crisis and recession, and then in the past year, a slowdown in China, the main driver of metals consumption growth. The price of copper, the flagship LME contract, has fallen 12 per cent so far this year and is down nearly 30 per cent from 2011’s record high; aluminium, nickel and zinc are languishing close to their lowest since the 2008-09 financial crisis.

But traders now say the gloom that many felt about the outlook for China just a few months ago was misplaced. Mr Keller says Codelco is seeing 7-8 per cent annual growth in copper consumption in the country – “more than we expected”.

George Cheveley, natural resources portfolio manager at Investec, says: “We have seen a change in sentiment since mid-year. Business in China is more settled than it has been for the last 12 months.”

Gu Liangmin, head of copper at Minmetals, the Chinese state-owned metals group, agrees. “We have seen some signs of improvement,” he told the FT.

The quietly upbeat outlook is repeated across different commodities – from copper, used in electrical wiring, to aluminium, used in cars and packaging, or zinc, used to galvanise steel.

In Europe, while no one is expecting a surge in metals consumption, some are tentatively predicting the first growth in demand for several years.

Oleg Mukhamedshin, deputy chief executive of Rusal, the world’s biggest aluminium producer, said: “Things are getting better [in Europe] especially in Germany, and France to some extent. There is also relatively good growth in the UK although it seems to be driven by real estate.”

Evidence of the improvement in demand can be found in annual contract deals thrashed out during LME Week and watched by traders as a barometer of the market. Codelco will increase the “premiums” it charges customers in Europe by 32 per cent next year, traders said; and a similar increase is expected in the larger Chinese market.

Will this rosy outlook for the global economy be enough to stimulate a recovery in metals prices? Some think so: in a poll of traders and hedge fund managers conducted by Macquarie, all six LME-traded base metals were predicted to rise in price over the next year.

Expectations were surprisingly upbeat, with the feeling that developed world recovery would reinforce demand for metals

“Expectations were surprisingly upbeat, with the feeling that developed world recovery would reinforce demand for metals,” says Colin Hamilton, head of commodities research at the Australian bank.

But few have much conviction in that view. Even if things have improved, no one is predicting the spectacular growth, particularly from China, that drove prices to records in 2008 and again in 2011.

As importantly, even though demand is improving, supply is improving too – in many cases at a much greater pace.

Copper production, for example, is set to grow by more than a million tonnes, or 5.3 per cent, next year, according to Macquarie – the fastest rate in more than a decade. Iron ore supply to the world market is set to jump 8.4 per cent. And metals such as aluminium and nickel are burdened by record levels of inventories, built up since the financial crisis.

Indeed, even Hernan de Solminihac, who as mining minister of top copper producer Chile has a strong interest in rising copper prices, could not summon a bullish view on the copper price. Increased supply would cause prices to “drop a little” next year, he predicted.