Deflation Fears Weigh On Metal Prices

The story is a glass half full or a glass half empty. Is the rout in oil prices the cause for the fall in global commodity prices or are falling commodity prices pulling down energy products? Either way global markets are focused on lackluster demand for metals and energy. Prices of copper and crude oil have seen increased correlation since oil prices collapsed in late November 2014. The correlation coefficient between the two commodities has been 0.8 over the past year, close to 1, which indicates a perfect match. It suggests that the two commodities have become more closely correlated, given that the correlation factor was about 0.3 the preceding year.

The stronger correlation is due to the lower cost of copper production resulting from the crude oil slump. British metals researcher Wood Mackenzie expects all mines around the world to produce copper for $3,086 per ton on average in 2015, down 9% from the previous year. Some 40% of the decline was due to falling fuel costs resulting from lower crude oil prices, with the remainder attributed to the strong dollar.

Nippon Mining & Metals, which operates copper mine in Chile, saw its pretax profit nearly halve on the year in the April-September period. “While the decline in the cost of copper production has only a limited effect, falling copper prices directly affect our earnings,” said an official of Nippon Mining & Metals. Swiss-based commodities giant Glencore and U.S. mining company Freeport-McMoRan have also started to cut their output.

Copper prices rebounded on Friday morning taking advantage of the declining dollar this week but gains are limited as the greenback rebounded in the morning session. Prices for nonferrous metals are falling, too. The prices of zinc, used for metal plating, are down 30% from November 2014, due to falling crude oil prices.

China’s economic slowdown has accelerated a global slide in resource and materials prices as declining demand shrinks the nation’s imports and leaves other markets swamped with Chinese products. The Thomson Reuters CRB Index has plummeted in November, reaching a 13-year low of 183.71 Tuesday. Copper prices have fallen 5% so far this week to their lowest in six and a half years, while steel product prices are down 35% this year.

Base metals are among the goods used heavily in China that now face an import slump. China accounts for roughly half of global copper demand, but a deteriorating property market has cut into its use for construction. Copper prices dropped below $5,000 per ton in London this month and kept going, touching the $4,500 range at one point Wednesday.

Precious metal traders do not seem to be that stressed over the slide in equities and the move to safe havens as gold eased over $5 in the morning session to trade at 1066.50 as traders count down the days to the Federal Reserve December meeting and probable rate increase. Fed Chair Janet Yellen next week has to decide not only whether to raise rates for the first time in a decade, but also how to assure markets on the likely path of future rate hikes. Traders currently expect the Fed to raise rates two or three times next year. The precious metal, on track for a third straight annual decline, has lost 9.5 percent of its value this year.  A stronger dollar was limiting interest in gold. The greenback rebounded from a one-month low on Thursday, boosted by rate hike expectations. Weakness in oil was also hurting bullion. A slide in oil could trigger fears of deflation, a bearish factor for gold, which is often used as a hedge against oil-led inflation.