Larry, from BizWeek:
OCTOBER 27, 2003
The Bull Is Ranging Into Metals, too
Prices are climbing, thanks to tight supplies and huge demand from China
Blame it on China. With newly affluent Chinese women clamoring for platinum jewelry and local manufacturers demanding copper, nickel, and other industrial metals on global markets, prices for a wide swath of commodities are soaring. Tight supplies because of past underinvestment in mines, a weak dollar, and a pickup in demand in China and elsewhere are all driving the trend. Says Paul L. Kasriel, chief economist at Northern Trust Corp.: "I believe we're in the early stages of a significant bull market in commodities."
Though the surge in the prices of metals -- far outstripping modest rises in oil and gas, grains, and other commodities -- hasn't yet kick-started inflation, the hikes are a big headache for some American manufacturers. Because a full-bore U.S. economic recovery hasn't yet materialized, manufacturers who try to pass along the price increases are finding that they have to absorb most of them. Says M. Brian O'Shaughnessy, chief executive officer of Revere Copper Products Inc., a Rome (N.Y.) maker of copper sheet strip and coil products: "We have to keep our customers competitive with imports."
Little relief is in sight. China has been setting the pace by importing nonferrous metals to feed its fast growing economy. It's hungry for everything from aluminum to zinc, using the materials to make goods ranging from consumer electronics to steel, as it supplies its domestic markets, the rest of Asia, and the West. Demand for steel alone is rising at a steep 20% a month. The result: Many metals are hitting highs not seen in years. Copper, now fetching about 88.45 cents a pound at the Comex in New York, is up more than 23% since Jan. 1, nearing highs hit in December, 2000. Aluminum, now trading at about 70.4 cents a pound, is approaching levels last seen early in 2000. And platinum, used in industrial products such as catalytic converters in autos as well as white-colored jewelry favored in Asia, has shot to over $731 an ounce, the highest since the early 1980s.
China isn't the only country sucking in commodity imports. Demand is climbing throughout Asia, particularly in Japan, where annualized growth of 3.2% in the first half of this year beat the U.S.'s 2.4% rise. Now, U.S. manufacturers are seeing a modest uptick in production, driving some to build up their metals inventories anew. Says James B. Krimmel, president of Zaclon Inc., a Cleveland company that uses zinc to make chemicals for galvanizing steel: "We've seen two consecutive months of increases in orders, and I'm hopeful that's the start of a turnaround."
Supplies of many metals have been unusually tight in recent years, as miners have underinvested in or shut down production. Throughout much of the late 1990s, investors plowed their capital into Web businesses and other areas, rather than putting it into the ground. So miners have been caught short as demand has climbed. Says Steven Strongin, director of commodity research for Goldman, Sachs & Co.: "We've had less investment and less capacity coming on line than at any time in recent memory."
BRISK RETURNS
Consider nickel. Chinese demand for the metal, used in making stainless steel, is growing at 25% a year and has doubled since 1998, making China a bigger market than the U.S. But the next big mines of major producer Inco Ltd. of Canada won't come on line until 2006, guaranteeing that supply will be pinched, as the industry is already operating at near capacity.
For investors, the commodities surge may provide a profitable alternative to the stock markets. The gains have been brisk. For instance, the $360 million Oppenheimer Real Asset Fund, which invests in financial instruments tied to commodities, is up about 18% so far this year. Says the fund's portfolio manager, Kevin Baum: "Commodities are offering protection at precisely the time investors most need it." So long as the global economy continues to rebound, the outlook for commodities is apt to stay bright.
By Joseph Weber in Chicago |
