Monday, August 20, 2012

Metals reflect economic weakness

The industrial metals markets reflect the overall weakness in global growth. The decline in many metals have slowed as the increase in policy and growth uncertainty has increased.Year to date:

LME copper -1.99
LME Aluminum -8.81
LME Nickel -17.02
LME Zinc -3.25
Shanghai Rebar -16.32 

The prices for many base metals is close to or at the marginal cost of production. The high cost producers will have to either shutdown or generate a loss on production. The price below the cost of production can be sustained for a period of time, but the economics of processing will have to takeover. The only problem with analyzing the marginal cost of production is that it is not stationary. If the cost of energy goes down, the cost of production will also decline. We are seeing this in parts of China.

Still, one of the key area of metals production is behavior of Chinese firms. They are often high cost producers, so the question is whether they will cut production in the face of lower or negative margins. It is also a issue of whether banks will call in the loans to these companies. Both are state  enterprise and this leads to increased lay-offs.The economics of marginal production may not work in the short-run.

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