Iron ore prices have been falling as of late much more so than the price of copper, a metal that the ore is very well correlated with, so a question that pops out of this price divergence is which price move, the ore’s drop or copper’s steadiness, is a correct signal as to what is going on in the global growth space, particularly in China.
“In truth, neither iron ore nor copper is a very pristine mirror on the state of manufacturing activity, either globally or in China itself. Copper is over-financialised. Iron ore is under-financialised,” writes Andy Home, a Reuters columnist.
He also says that the iron ore price is not just linked to China but made there and in many ways, it is not a global price.
But so is with copper in many of the same ways despite being financialized and subject to speculative attributes rather then attributes of the supply and demand: copper’s meteoric price rise in last 5 years has been predicated on growth and export specter in China and now that both are falling why isn’t copper as well.
With storage space controlled by the same big box financial outfits that trade copper on the financial market, physical deliveries of the metal are artificially constrained, costing the users a premium that jacks up the marginal cost of production. Glencore’s relentless pursuit to purchase Xtrata, moreover, is showing that some of these big trading players are also eyeballing to completely vertically integrate and exert dominance over every level of commodity production and delivery.
With the advent of the ETFs and lax regulation that allows speculators in metals to exert physical control over stuff they trade, western economies, indeed global, have been undergoing a massive taxation that amounts to a wealth transfer from producers to the financial sector.
This is also true of oil and if the legislators succumb to the demands of the big box financial houses, virtually any standardized product could come under their controlling spell, have its own ETF, be subject to speculative sentiment… As a digressive exhibit, witness Citigroup Chief Economist Willem Buiter’s musings on how and why water should be subject to financialization.
Anyway, one resultant of the collapsing iron ore price is a slew of project cancellations by the Australian miners. Some $246 billion in investments is being sidelined a bankers become concerned about what is it that they are funding.
In another sign that what happened to iron ore maybe a macroeconomic tipping point is not just the mining investment but also the employment picture in Australia, disproportionately bloated and swelled.
The employment in Australia’s mining sector dropped 4,600, the first quarterly drop since mid-2009, and more lay-offs are expected. With Chinese signaling that they view any massive stimulus a detriment to Chinese economic health, negative datapoints in Australia ought to pop up with more frequency going forward.
Having said all this, will copper go lower to recorrelate with the iron ore or the other way around?
Short-term odds favor the upside in the ore as the strong mining hands step up and scoop up the bargain while central banks inject liquidity boosting copper. The story over the longer-term looks more negative and it is worth remembering these negative headwinds once the long-term arrives.