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Terrorist attack intensifies the slowdown in industrial metals

By Peter V O'Brien

Friday 5th October 2001

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A slowdown in US economic growth, fears of international recession and the effects of the terrorist attack on September 11 have combined to make significant cuts to prices for non-agricultural commodities, particularly for industrial metals.

Tables I, II and III show the prices for six industrial metals, the New Zealand dollar's movements against seven currencies (including changes to the trade-weighted index - TWI) and prices for the three precious metals, gold silver and platinum from the end of 1999.

Oil prices were falling before the attack on New York's World Trade Center but took a 15% dive on September 24 and on that day were about a third below their 2001 highs.

It is an open guess what will happen to oil prices but there would be some cushion for northern hemisphere countries, in particular, if they remained at or close to those of late September.

A year ago oil prices were relatively high as international economic activity was good and Opec was reducing output.

NBR Personal Investor's survey of commodities last year (Oct 6, 2000) noted the then latest increases in price of diesel oil, for example, were affecting farming, fishing and the road transport industry with fuel bills for some operators 50% ahead of the same time 12 months earlier.

The downward movement in metal prices was well under way before the terrorist attacks, as shown in Table I, but they accelerated after September 11.

Changes from the end of August 31 to September 21 (the cutoff date for prices in this survey) were quite sizeable compared with other months in the table. The situation was explained in Australian mining heavyweight Rio Tinto's interim report for the six months ended June.

Chairman Sir Robert Wilson said the company saw little to encourage optimism about metals demand in the US during the rest of this year and, probably, the first half of 2002.

"Neither Europe nor Japan look like the engine for recovery and so 2001 could be the first year since the early 1990s when we will see global consumption of key non-ferrous metals decline, albeit by not very much."

Sir Robert said low levels of investment by the industry in new capacity as the downturn was entered, combined with low stocks and supply-side difficulties, especially in aluminium, had all served to mitigate the adverse consequences.

"Nonetheless the markets, and therefore presumably the prices for most metals and minerals seem likely to remain subdued over the next 12 months. High energy prices will continue to put pressure on the industry's coal market."

Sir Robert was writing at the beginning of August and said the economic outlook was still deteriorating and the company expected a testing time ahead. He would probably be as shocked as most people to see how testing the time has become.

The price movements in Table I confirmed Sir Robert's views. Price trends since last October were the opposite of those in the preceding 18 months and are likely to continue unless there is a dramatic change to the international economic and political situation.

Movements in prices for industrial commodities are more than academic for many New Zealand investors. It was noted in earlier NBR Personal Investor commodity surveys that brokers had hundreds of clients who were active traders in financial and commodity futures.

They could have done well over the past year, provided they read markets and economies with precision. A decline in prices for industrial commodities has three elements for the New Zealand economy: their actual level, reflection of recessionary pressure and the currency value factor.

Currency movements are a special complication for New Zealand users of industrial and mining companies and/or deal in commodity futures. The price of the imported commodities may decrease, but much of the benefit for New Zealanders can be diminished when account is taken of the currency.

Changes to the New Zealand dollar's value since the end of 1999 are in Table II. The movement against the US dollar is particularly important because many commodities are traded in that currency.

A drop of 21.1% in less than two years was obviously good news for exporters of agricultural products. They benefited from rising prices for their goods in absolute terms and gained on the exchange rate.

Tables of prices for agricultural commodities were excluded from this survey, because they are printed elsewhere in NBR (page 36) but they rose strongly this year, following the trend that became apparent in 1999.

Higher export volumes accompanied the price gains, and the addition of a soft exchange rate further improved returns to the farming community and industries that service it.

Those comments are subject to the point that sensible exporters and importers take forward exchange cover. They are traders in goods and should not be currency speculators. It is better to have a known exchange rate, even if may cut the achievable return, rather than exposed to the risk of fluctuating rates.

There are pros and cons in that argument, as shown in the Enza saga, but they do not affect the main point of the effect the exchange rate can have on the returns from the costs of movements in commodity prices.

Recent events seemed to have a interesting impact, although indirectly, on commodities. Overseas sharemarket reports toward the end of September suggested investors on the Hong Kong stock exchange were solid buyers of shares in mainland China companies.

The reason given was that China's growth was a good hedge against global uncertainty and recessionary fears after the attacks in the US.

China has been growing from a low base while the major industrial countries have been retreating from a high base, so there was some logic behind the reasoning.

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