Nickel and dime traders beat the odds

By Peter V O'Brien

Friday 4th October 2002

Anyone playing international commodity markets, particularly industrial metals, had a tough time this year unless they bet on prices falling and took appropriate positions.

Nickel and tin were exceptions and New Zealand-based traders could have benefited from the overall rise in the kiwi dollar.

Price movements for six key industrial metals and the relationship of the New Zealand dollar to seven overseas currencies are in Tables I and IV. The latter table includes changes to the trade-weighted index over the past nine months.

New Zealand end-users of industrial metals would be happy at the changes to metal prices (generally) and the dollar's value (generally upward) in the period.

The best summaries of the outlook for metals come from companies that mine ore and process it. Australia's BHP Billiton is among the biggest. Its preliminary report for the year ended June 30 said: "There is cause for concern about the global economy. Although OECD industrial production continues to post small monthly rises, it remains below the levels of a year ago.

"After some early gains, the US economy is struggling to maintain momentum; growth prospects across Europe remain subdued; and a rising yen threatens to detail Japan's export-led recovery.

"Business investment and non-residential construction remain weak in the developed economies. Only across Asia does production continue to improve, particularly in South Korea and China where annual growth is approaching 8%.

"In recent weeks extreme volatility in equity markets, falling business and consumer confidence and heightened risk aversion have cast a pall over the global economic outlook. In reaction, the price of many traded commodities have fallen to, or near, multi-month lows."

Table I confirms BHP Billiton's assessment of recent price movements, remembering they are month-end figures and consequently disguise volatile changes within particular months. The mirror image of international events is shown in Table III, which records change in spot oil prices since the end of last year.

Oil industry purists might query the use of West Texas intermediate crude as the base but a combination of space and the fact that the other market indicators move roughly together accounted for the decision. Price hikes are normal when international political increases and people perceive threats to oil supplies. They happened at the start of 1991 Gulf War, although a price fall followed quickly when the conflict proceeded to its inevitable conclusion.

The oil industry seems to expect similar price patterns if the US and or the UN attack Iraq. Oil price stability will depend in part on maintenance of supplies to the US, which is not self-sufficient in oil.

Other Middle East suppliers are generally Islamic countries, which may need to take account of fundamentalist reaction against them. Those matters could also have an effect on the trading strategies of people who deal in the commodity markets' derivatives.

Many industrial traders may never see the physical underlying commodities, such as aluminium, cocoa, copper, the quaint pork bellies, oil, wheat, wool or anything else for which there is a market. That is an extension of the strange phenomenon whereby a fair number of foreign exchange dealers would be unable to recognise the physical banknotes of some currencies they trade.

New Zealand investors trade agricultural commodities but market access and requirements are more involved than, for example, dealing in equities or fixed-interest securities. NZ-based brokers organise such deals and have done for some time to satisfy people's desire to be part of international markets and to take a profit (hopefully) on the way.

Playing commodities markets can be a dangerous form of gambling. Returns go in cycles, something comes off the top and the losers are offset against the winners.

The latter are often organisations that need physical material for processing into industrial or consumer products. They must use the goods eventually and naturally make sure they get them at the best price, irrespective of what happens to speculators.

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