Base Metals Set for Near Term Correction

September 6, 2006 at 12:30 pm  ·  Category: Commodities, Macro Economics

Driven by torrid growth in China base metals have experienced a phenomenal bull market the last few years.  Copper has gone from around 75 cents/lb. three years ago to more than $3.50/lb. today.  Nickel has gone from around $2/lb. towards the end of 2001 to more than $14/lb. today.  Lead has gone from under 20 cents/lb. in 2002 to almost 60 cents/lbs. today.  Zinc has gone from under 40 cents/lb. in the middle of 2003 to over $1.60/lb. today. 

What is a base metal?  Doug Casey describes them this way:

Base metals are called that because they oxidize, corrode and react easily.  the primary ones we’re concerned with are: copper, nickel, lead, zinc, aluminum and iron.  Their inherent value lies in their industrial uses….  their fortunes are tied to the state of the world’s economy…..

And just what is the state of the world economy?  As we quoted Morgan Stanley Chief Economist, Stephen Roach, last week, it might be about to catch a cold:

Exports now account for more than 35% of Chinese GDP and the largest portion goes to the US…….. The rest of Asia is in a similar position.  According to Andy Xie, about 10% of the total GDP for Asia ex Japan is earmarked towards shipments to the US (Andy Xie, “Asia: The Decoupling Myth“, Morgan Stanely Global Economic Forum, August 23, 2006).  China’s ever expanding Asian supply chain means that component producers such as Korea, Taiwan,and even Japan are vulnerable to a consolidation of US consumption.  The same, of course, can also be said for non-Asian external sourcing of Chinese materials requirements – a pipeline that now stretches into South America (i.e. Brazil), Australia, Canada, and, more recently, Africa.  In short, if the American consumer sneezes, economies in both the developed and the developing world could easily catch a cold. 

Doug Casey echoed this sentiment in his recent (Aug 14) article on base metals:

…… we are bearish on the U.S. economy and are not sure that even China can pick up all the slack we see coming, especially with so much of their economy going into exports to the U.S. 

What does this mean for base metals?

In the short term (zero to 12, maybe 18 months) we see a high probability of economic woes leading to a major correction.  That will be our time to reenter base metal plays aggressively.

Consequently, we are holding off on buying any new base metal company stocks…….

This all makes alot of sense to me.  It might be time to take a little profit on any base metal companies you own and have some cash ready for better buying opportunities in the next year or so. 

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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