It's all coming together in the metals markets. Or is it?
We've got a barn burner going on in the metals, as copper takes out levels it hasn't seen in two years.
It's easy to see that it could be demand, because there is ample evidence that worldwide growth is improving. It's anecdotal -- the IEA saying energy demand's growing, Cummins calling the bottom in China, auto sales in Europe coming on strong, all but Venezuela reporting better numbers, the positive move in the ruble, some strength in aluminum, and the Cliffs Natural (CLF) call that iron ore producers are now being rational and prices are headed higher, you name it.
Last Friday's 4% spike in copper, on the back of the BHP Billiton (BHP) decision to declare force majeure because of a strike at its gigantic Escondida mine in Chile, only furthered the tightness thesis. That's on top of a decision earlier last week by Freeport-McMoRan (FCX) to slow production at its Grasberg mine in Indonesia.
But the one thing that we really can't see happening, the one thing that would make me more comfortable about this whole commodity rally, would be some sustained demand, somewhere, anywhere.
In the U.S. for example, we would need to see auto sales accelerate to maintain these commodity prices. But by all counts, auto sales have stalled here. When you are talking copper, you are talking homes, and while we only use about 10% of the world's copper our home sales seem to have plateaued, too.
Commercial construction growth is coming, but not fast enough to elevate these commodities any longer.
Europe's got strength, but don't look at it as a commodity booster. Same with Latin America. I don't see much happening in Asia, except of course, in the country that uses 50% of the world's copper, none other than China. Here, we have pure gross domestic product rate of decline that has yet to be stemmed, so it's difficult to pinpoint how much demand there might be.
However, both Cliffs and Alcoa (AA) on their calls made it very clear that the Chinese are, at last, cutting back on the dirtiest of their smelters and are importing cleaner iron ore, the type that Cliffs makes.
How long this can go on isn't clear, as periodically the Chinese seem to be more focused on the near one million deaths caused by respiratory illness that could be prevented by cleaner manufacturing and then they waver and worry about unemployment.
Suffice it to say that there have been many calls to buy the irons, the steels, the coppers and the industrials connected with them -- that is the ones that get the stuff out of the ground -- but not once have I seen an actual demand improving call been made.
These stocks can rally only so far before we are stuck with a genuine demand threat.
I say trade, don't invest in them, and be aware that the trade is already long in the tooth, unless you see demand accelerate. And so far, I haven't seen it.
