Metals market outlook

"Buy or sell?" This question investors constantly ask myself. There are, of course, there is no universal right answer. It depends too much on the person, or a corporation’s, specific circumstances. In theory everyone acknowledges the veracity and wisdom of buying when there is blood in the streets, or straw hats in winter. But in practice it is extremely difficult to do because everyone is concerned that bad things can get worse. And when the sun is shining no one can conceive of things being anything other than bright and shiny.

In part these attitudes can be put down to age. Once you’ve lived through a few crises another one just seems par for the course. Youngsters find each new drama unsettling which is one reason perhaps that contrarian investing is always so unpopular. Few people have the sagacity of Warren Buffet, who recommends investing in Japan now. But the reassuring factor about wars, insurrections, earthquakes and tsunamis is that they are not monetary. They were not caused by financial speculation.

It might be fair to say that many insurrections in the Arab world were, ultimately, caused by the greed of their despotic rulers. And if that is the case, and if the era of the greedy despot is passing, then the changes that are now underway will have far reaching and deep rooted consequences. What every country needs before its economy can really take-off, as China’s and India’s have done, is a burgeoning middle class.

Such a class was never allowed to develop in Tunisia, Egypt, Libya or Syria. The elite did not want to share their wealth with their countrymen. But if these revolutions succeed, and it is hard to envisage the populace being content with the old order now, it could mark the start of a massive surge of growth in countries that historically have had no significant economic footprint. Like the Indians and the Chinese, Arabs are famous for their trading and entrepreneurial skills. Ally that with oil resources, and the potential for creating wealth is phenomenal.

This global uncertainty has unsurprisingly triggered a correction in some growth correlated asset classes, such as equities and commodities, in recent weeks. Base metals in contrast, as measured by the LME index, continue to make good progress. A gain of 2.9 per cent on the week takes the rise over the year to date to six per cent. It might not be dramatic, but it puts the asset class in a healthy situation relative to others.

What is interesting is the rotation within the sector. Copper led the way initially and breached the US$10,000 a tonne barrier but has since drifted back and is essentially flat on the year at US$9,700. In contrast, aluminium has made steady progress over that period and is up 5.7 per cent at US$2,595 a tonne. Like copper, nickel has drifted back from its peak but unlike the red metal is still showing an eight per cent gain on the year. Lead has been a bit more subdued but is still 5.4 per cent to the good over the year. It is only zinc that has let the side down with its 2.4 per cent slide but a modest 20,000 tonne increase in LME inventories to 735,000 tonnes provides a reasonable explanation.

It would be easy to us the current news flow as an excuse to sell out of growth assets like metals and mining shares. But if these changes in the Maghreb become embedded and allow the region properly to join the democratic capitalist world, then the scope for growth and increased metal demand must be positive. Even today the bulk of metal demand comes from a handful of countries like the USA, China, Germany and Japan. Anything that allows that list to grow is good news, even if it doesn’t feel like it at the time.

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