Deutsche Bank: Commodity markets are finally back in balance

The crash in industrial commodities on the Shanghai Futures Exchange went global last week. Many traders feared a further rout in base metals was about to begin.

Nowhere was that more evident than in copper where the price on the US NYMEX exchange closed less than half a cent above $2 a pound before an aborted 5% rally which took the price above $2.10 a pound.

But it wasn’t just copper, it was nickel, lead zinc and aluminium. All industrial commodities all suffering from fears about Chinese growth and all having their own mini-crashes before recovering.

In the end Copper closed the week at $2.0525 still a healthy gain on the low of the week. But it was also the lowest weekly close since July 2009.

CME Copper – Screenshot

But things could be about to change according to Deutsche Bank analysts writing in the bank’s DBWeekender publication.

The bank highlighted the occasional folly of trying to pick the bottom of the market, pointing out that “Contrarian investors end up looking outstanding or idiotic.”

And, they also highlighted how “amid slumping Chinese appetite, the IMF recently noted that demand from the rest of the world for aluminium, copper and nickel has barely grown since 2002.”

But they also note last week’s well-off might have been the pessimistic crescendo markets need to get back on even keel.

Current pessimism, though, may be overblown. Relative to per capita incomes in G7 countries, copper, tin and lead now trade at their 40-year average suggesting prices have normalised after a 15-year boom. Fundamentals also offer hope. Take the copper market till 2020 for example. Assuming ex-China demand flatlines and Chinese demand growth drops two-thirds to 2.5 per cent, supply and demand remain balanced even if production increases at 1.5 per cent annually – the upper-end of industry’s capacity given recent investment.

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