Downunder Daily Pedal to the Metal

Pedal to the Metal
Industrial commodity prices have been caught in
the general set-back to risk trades. This will be a
buying opportunity, in our view: Underlying supplydemandfundamentals remain supportive, and it remains early in the growth cycle. Given the usual correlation,this is also positive for mining companies. This fits with one of our 2010 themes: a preference for the producer over the (Western) consumer.

Commodity prices have been caught up in the set-back to risk assets. The LME base metal index has fallen by 15% from its mid-January high. On a long-term view, metal prices are above their long-term average (in realterms), but remain well below 2007-08 levels (Exhibit 1).

Commodities are clearly a winner from the rise of
emerging market economies – and, more to the point, their resilience in the face of a very deep downturn in developed economies. As our macro colleagues keep emphasizing, the world has embarked on a two-speed
recovery, with lackluster developed-economy growth,
but strong emerging-economy growth. We have just
upgraded our Asian growth forecasts, despite the recent
Chinese tightening. See Joachim Fels, Global
Economics: Asian Amplification, 4 February.

Industrial production data already reflect the two-speed
economy: Production in the G7 is still 11% below yearago
levels, while growth in the big Asian economies is
up 7% (Exhibit 2). The OECD’s leading index points to
further acceleration in overall production growth (OECD
plus the big emerging economies – see Exhibit 3).
Against this backdrop, Peter Richardson, our chief
metals economist, expects a 30%-plus increase in base
metal prices this year. (See Global Metals Playbook:
Gathering Momentum, 13 January.)
M O R G A N S T A N L E Y R E S E A R C H

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