Double-edged commodity trends

When talking about commodity markets, for obvious reasons crude oil hogs the limelight. The impact of oil supply and prices on the global economic cycle is huge, with a further impact on inflation.

Historically, higher oil prices have had a dampening effect on global growth.

But this time around, the impact has been less detrimental, as the petrodollars from the Middle East have been recycled into the economy here as well as into the global economy, adding liquidity.

However, it's the other way round for metals compared to oil when it comes to the relationship with the global economic cycle.

“It is more the movements in the economic cycle that impact on the metals market,'' says Kevin Norrish, head of commodities research at Barclays Capital, UK. “But I wouldn't want to understate the importance of metals supply. It's important for all parts of the world.''

In recent years, however, the intensive industrialisation of China has brought the metals market into sharp focus. China is now by far the world's biggest consumer of all industrial metals.

Last year was a mixed year for commodities, with “declines in energy and soft prices…offset by gains in metals and grains,'' says a Standard Chartered Bank report. The price outlook in 2007 depends on supply prospects, it says.

Improving supplies and moderating demand growth should bring raw materials prices lower.

In another report, ABN-Amro suggests that most industrial metals should revert to global surpluses this year.

Differentiation

Yet, it varies by commodity. “Differentiation is now key,'' says Helen Henton of Standard Chartered.

Copper is a long way below its peak and is trading at around $5,700 a tonne now, having peaked last May at above $8,000 per tonne. “That's a fairly hefty decline, and it has attracted a lot of attention,'' Norrish of Barclays Capital says.

In the last few weeks, in fact, the market has shown signs of strength, with most metals trading high.

“Nickel has made a fresh high almost every single day this year. Tin prices are hitting fresh highs for the current cycle. Lead and zinc are close to all-time highs. Aluminium prices have moved up very strongly. And copper is also making a recovery.''

What does this all mean for the Gulf region?

In Bahrain and Dubai, large aluminium smelters exist. There are plans to build new aluminium smelters in Qatar operating on natural gas.

High aluminium prices are supporting the expansion of the industry in the Gulf. “That's a positive factor,'' says Norrish. “But some of the demand for aluminium is driven also by increased construction activity across the region.''

That goes not just for aluminium but other metals too — copper, zinc, steel. All are being used widely in the region. There has been a strong growth in demand of metals from this part of the world.

“If you are looking at the budget for constructing ‘international' buildings, those [costs] would have moved up a very long way, partly because of increases in labour rates, but also the price of raw materials,'' Norrish says.

For the Gulf, therefore, the trend in metals cuts both ways.