Bottom line is falling commodity prices do not automatically mean that demand is also falling…
A Bloomberg headline, “Bear Market in Tin Shuts 70% of Indonesian Capacity”, this morning prompted a look at the global price history of tin and what the article may be actually be saying. The author’s focus is on weak tin prices causing the shutdown of tin smelters in Indonesia and this is connected to the belief that this is due to a global tin consumption slowdown. The President of the Indonesian Tin Mining Association is quoted:
“Most smelters have closed,” said Hidayat Arsani, the president of the Indonesian Tin Mining Association. “The price just cannot cover the cost. Ideally, the price should be around $21,000 or $22,000 a ton. If this continues, we can’t work anymore.”
The article states:
“Metal (Nickel) for delivery in three months, the LME’s benchmark contract, fell 18 percent in the past year. Of the bourse’s six main industrial metals, only nickel and aluminum slumped more.”
The link to the full article is: http://www.bloomberg.com/news/2012-08-20/bear-market-in-tin-shuts-70-of-indonesian-smelters-commodities.html. It is reports such as this one which cause market watchers to cringe in fear of another recession, but I think that there is more here than that which comes from the casual observation that commodity prices fluctuate as with changes in economic demand. The term “Commodity Financialization” provides a more appropriate context than that derived from simple economic supply/demand context. What does the chart tell us about what affects tin pricing long term?
The Tin Price&Production History chart below provides a perspective which I think permits a different analysis of not only of factors influencing tin but all commodities in today’s environment. In the chart historical tin prices in US$ per metric ton are represented by the SOLID GRAY LINE. The tin price trend line of 3.14% is represented by the DASHED GRAY LINE while the tin price adjusted for inflation in 1998 US$ is represented by the SOLID DARK RED LINE. Global annual tin production in metric tons is represented by the SOLID LIGHT BLUE LINE and is plotted on the right hand axis.
Items to Note on this Chart:
1) Tin prices have inflated ~3.14% annually since 1900 and except for the recent price surge from 2002 to 2010 prices would have been below the long term price adjusted for inflation.
2) Tin global annual production varies widely, but in general it has grown ~1% annually and below the price trend growth rate. (Production growth is a very rough est. due to volatility of data)
3) Instances of significant tin price increases have accompanied periods of intense fear of inflation and debasement of US$ vs. other global currencies. See US$ Inflation Scare ARROWS.
4) Tin prices decline as inflation and US$ debasement fears decline and investor psychology normalizes.
If one looks to other commodity charts which are priced in US$, i.e. oil, copper, gold, silver, cotton, farm land, nickel and even coffee, one can find that similar price changes occur concurrently which are not connected to the simple economic consumption relationship of supply/demand. One finds in the historical record an identifiable component which can be directly attributed to periods of investor inflation fear and loss of purchasing power. When investors fear that events will negatively impact financial assets, they often run to commodities seeking to preserve wealth. One can see this occurring in WWI-1915-1917(WWII had price controls), the Korean War 1950-1953, The Great Inflation 1965-1982, Iraq 2002-2003 and the period of China’s recent economic surge/US$ sub-prime meltdown 2007-2012.
When we have a period of higher pricing for anything, we have always brought on greater supply often from marginal sources. Often there is hoarding of supplies not only by users but also by investors who believe that they can make a profit buying low-holding for a period-then selling higher. Hoarding in itself limits genuine supply and drives prices higher.
BUT, WHAT IF?: If the majority of demand was due not to normal economic supply/demand, but to that from investor activity/speculation as the data in the chart suggests, then when this investment activity declines so will price. The perceived demand slowdown is often incorrectly interpreted as an economic slowdown. Marginal suppliers become suddenly unprofitable and are forced to shut down facilities. My interpretation of the Bloomberg tin article is that the Commodity Financialization since 2002 is being reversed today.
My personal view of the tin story is that we have been in a speculative period for commodities since 2002 which is beginning to unwind even (or because of) as the actual economic consumption is improving. One comes to this conclusion by observing the strong rise in Household Survey Employment, strong Temp Employee demand, strong Help Wanted demand, US In Production, Retail Sales, Exports/Imports, improvements in Mfg. Employment, strong Light Vehicle Sales and the delayed but now strongly improving HAHB HMI. Neither high inflation nor a debased US$ has occurred from all which has developed from the past 15yrs of global spending excesses. This interpretation is supported by the price patterns in the chart below which can be related to previous periods in which inflation and purchasing power fears dominated.
US$ inflation fears have NOT been supported by the facts! Commodity Financialization appears to be retreating!
When investors come to understand that they can gain higher returns from equities than commodities, commodity prices will fall and equities will rise. When fears of inflation and currency debasement fall, investors sell not only commodities but sell bonds as well. A robust and expanding economy that is recognized by investors result in falling commodity prices (as fears subside) rising rates (as investors seek higher returns in stocks) and rising stocks.
My personal interpretation of the current economic environment and one which most investors have failed to understand that the US has always solved its financial problems! Getting there has always been messy, but we have always gotten there as history attests. Most investors, not having a historical perspective, have in each instance failed to take advantage of periods such as today to the benefit of their long term portfolio performance.
Most investors are lost in the fears of the day! Falling commodity prices are positive! You should be optimistic. I am!