The fortunes of base metals producers are based primarily on one very big customer China. So it’s little wonder that most stocks associated with producing copper and other metals are stuck in no man’s land right now up from recent lows but nowhere near their earlier highs.
The stocks appear to reflect uncertainty about China’s economy with investors split over whether growth has been seriously hurt or merely interrupted.
For example, BHP Billiton Limited has bounced 25% since June but is still down 26% from its recent high in April 2011. Similarly, Rio Tinto has risen 27% since June but is down about 30% since February 2011.
The seesawing is likely due to a recent round of encouraging economic news from China which accounts for about 40% of the world’s copper demand that followed earlier concerns that the country was being buried in excess copper inventories.
As Standard Chartered reported in April (via FT Alphaville ) “On a routine trip to examine copper inventories in the bonded area in eastern Shanghai last week we were astounded by how much copper is being stored in warehouses. At one of the biggest operators, they continued, the covered warehouses were full. The staff car park was used to store copper. The driveway between warehouses was blocked by copper. The warehouse operator told us that it cannot accept additional inventory until existing inventory is shipped out.
No wonder base metals producers were suffering back then. But Standard Chartered noted in the same report that it probably wasn’t wise to get overly bearish if the global economy improved in the second half of the year.
While Europe continues to fizzle and the US economy has been making little more than slow progress in its recovery, China has been providing some encouraging news. The HSBC manufacturing purchasing manager’s index for November rose to 50.5 from 49.5 in the previous month, YoY industrial production rose 10.1% from 9.6% in October and retail sales rose 14.9% in November from 14.5% in the previous month.
Mr Alberto Ades co head of global economics research at Bank of America said that “Growth in emerging markets should be led by China, which will likely avoid the feared hard landing. China’s short-term growth momentum is already on the upturn and annual gross domestic product growth should rise to 8.1% in 2013 from 7.7% in 2012.”
