Thursday, July 13, 2006

Short view By Philip Coggan - Financial Times

Short view By Philip Coggan
Published: July 13 2006 03:00 | Last updated: July 13 2006 03:00
Copyright The Financial Times Limited 2006

Commodities have resumed their upwards march. Nickel touched a record high of $26,000 a tonne yesterday, while copper bounced back over $8,000. Gold, partly bolstered by the Mumbai bombings and Middle East tensions, hit $650 an ounce. Mining stocks are leading the equity performance tables.

The bounce-back in commodity prices reflects greater investor confidence about the outlook for global growth, partly because the US Federal Reserve is expected to stop fiscal tightening and partly because economic data in Asia and Europe still look robust.

Demand from China is universally assumed to be the long-term driver for commodity prices. But has it been behind the recent revival? Graham Turner of GFC Economics points out that, while Chinese imports rose 18.9 per cent year-on-year in June, after seasonal adjustment, the first-half gain was 4.9 per cent.

If one strips out rising prices, the statistics look even more remarkable. Mr Turner says Chinese iron-ore imports fell 5.5 per cent in the six months to May, while copper imports fell a remarkable 57.4 per cent, year-on-year, in real terms.

Those numbers are in stark contrast to the 10 per cent-plus gross domestic product growth that China is expected to announce in the first half. Many outsiders are suspicious of the rather smooth progress displayed by Chinese GDP in recent years. Tatha Ghose of Dresdner Kleinwort has put together an alternative set of data, based on industry-specific statistics, which indicate that Chinese manufacturing and capital expenditure have slowed significantly in recent months.

That slowdown could have sparked the commodity sell-off in May and June. And if the commodity sell-off led to a general retreat in risky assets, then we have a new potential culprit for the market correction - not the Fed or the change in Japanese monetary policy but a moderation in Chinese activity.

Dresdner's indicators also suggest a rebound for Chinese activity is now in prospect. So the pick-up in commodity prices could be seen as confirmation of that change in trend. Now that prices are moving higher, speculators have every incentive to jump on the bandwagon again.


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