The Hindu Business Line : Bullish signals for metals market from OECD data

THE positive OECD lead indicators data released recently point to recovery and could well turn out to be bullish for 2006 demand. The data showed an improvement in the all-important composite lead indicator six-month rate of change with the indexes for the US and the OECD as a whole turning positive again after three months of negative readings. The close relationship between the OECD lead indicator and the western world industrial production is well known. In turn, there is also a close relationship between industrial production and consumption of steel and base metals.

A supportive factor is the unexpectedly strong US job growth data.

"What is important to note is that rarely do these turning points in the OECD lead indicator provide a `false start'," said Mr Jim Lennon of Macquarie Research Commodities, adding that once a turning point has been reached, it always keeps rising strongly.

A strong turnaround at the bottom and the peak of the cycle reflects the large component of stocking and destocking that always exaggerates the change in demand, the expert said.

The US steel market provides a good example. After a strong demand growth in 2004, when heavy over-stocking propelled US growth to 14 per cent year-on-year, there has been massive de-stocking this year with apparent consumption down each of the last three months.

Rather unusually in the current cycle, the downturn has been savage and many markets have remained in a tight supply position.

By November/December the demand recovery could be starting to create havoc in many markets yet again as supply fails to match demand requirements, according to Mr Lennon.

Experts believe that although the OECD data do not reflect the role of China, which is an important factor in the world commodity market, especially base metals, the markets other than China continue to be significantly large.

Admittedly, the historic relationship between western demand changes and metals prices has broken down. Western world alone does not anymore dictate metals prices. The role of Asian economies is becoming increasingly important.

The markets are becoming more globalised and integrating. Prices are driven by the interaction of world demand and supply, and not just western demand.

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