COMMODITIES LOOK BEYOND CLOUDY OUTLOOK / THE FINANCIAL TIMES ( HIGHLY RECOMMENDED READING )

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Note from the editor
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Commodities look beyond cloudy outlook
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By Jack Farchy in Santiago




Is this the moment when commodity markets throw off the shackles of the macroeconomic outlook?


For investors fretting about a Chinese slowdown, excited about the US recovery, or living in fear of a eurozone meltdown that may seem hard to imagine.


But it appears to be happening in several markets. One of the clearest examples is to be found in two markets to which few investors pay much attention: nickel and ferrochrome.



Both are used overwhelmingly by the stainless steel sector and their prices might therefore be expected to move in tandem. Traditionally they have done.



But in the past few months they have taken opposite paths. The price of nickel on the London Metal Exchange has fallen 17 per cent since early February to trade at $17,134 a tonne, close to a two-and-a-half-year low.



Ferrochrome producers, on the other hand, have just agreed a 17 per cent increase in second-quarter European benchmark prices to $1.35 a pound, within reach of a 3½-year high.



What’s going on? The most important driver of the divergence has been the impressive production discipline of the South African ferrochrome industry. The country’s producers, led by Xstrata, have curbed ferrochrome output by 425,000 tonnes in recent months, according to estimates by Macquarie. In a market which produces just 8.7m tonnes in a year, that is an enormous loss.



Nickel supplies, on the other hand, are plentiful. Chinese production rose 9 per cent year-on-year in the first two months of the year, Macquarie estimates, and the rest of the world’s miners are also bringing on numerous new projects.



For sure, the ferrochrome industry has had a little help. Eskom, South Africa’s state utility, has offered generous incentives to ferrochrome producers who close their furnaces in an attempt to avert an extreme electricity shortage. They may get more: the industry is lobbying for an export tax on chrome ore, the unprocessed form of the commodity, which would most likely push prices up further, at least in the short to medium term.



The divergence between the two commodities is interesting beyond the small world of stainless steel, however. It demonstrates that the supply side is coming back into force as a determinant of commodity prices. That is possible because for the first time in a long while, global demand is neither great nor awful, it is just average.



The impact can be seen across the commodity markets. Those with a tight supply picture (soyabeans, gasoline, copper, oil) have gone up, while those where supplies are ample (nickel, aluminium, wheat, sugar) have gone down. Another example of the theme: arabica coffee is down 22 per cent so far this year, while robusta is up 11 per cent.



This is good news, not just for beleaguered commodity analysts, but also for hedge fund managers who have been infuriated by the high correlation among individual commodities, and between commodities and other asset classes.



Greece, Beijing, or Ben Bernanke may yet spoil the party, but for the time being, the supply-side is back in the driving seat of commodity markets.