June 18, 2012
Buying The Market, Literally
Rob Davies
If you are not sure which part of the market is going to go up, then it makes sense to buy all of it. And that, literally, is what the Chinese have done, by buying the London Metal Exchange for £1.39 billion.
According the Financial Times that price is somewhere between 120 and 180 times last year’s earnings, which seems appropriate in a funny sort of way, since the exchange is 135 years old.
It is of course entirely sensible that markets migrate to where the demand is. In times past regional centres of metal processing, like Swansea, had their own metal exchanges, but business migration and technology subsequently resulted in London becoming the dominant centre for commodity trading.
Now that China accounts for 40 per cent of world metal demand it makes sense for it to own the exchange, even if it does not physically move.
And there was plenty of news flow this week to remind the market why the east is more important. US industrial production fell by 0.1 per cent in May, but during the same month inventories of copper in Shanghai fell to 130,143 tonnes. This is the lowest level this year.
It is true that concerns over slowing growth in China hit mining shares and pushed the LME index down one per cent to 3,210.7. Nevertheless, China is still growing, in marked contrast to some other parts of the world, most notably Europe.
And while the euro-drama keeps everyone transfixed, the ultimate outcome remains as unclear as ever. What does seem obvious, especially to Anglo-Saxon capitalists, is that the highly ordered structure of the eurozone seems destined to follow the Second Law of Thermodynamics and become disordered.
The elegant creation of bureaucrats and politicians united under the rules and regulations of Roman Law is about to be destroyed by the raw brutality of free markets under common law.
The concept that no one actually knows the right price of anything until tested by competing buyers and sellers is anathema to those that wish to control such matters. But it is the only one that works.
This resistance to letting markets determine the right price is making the whole process much more protracted than it should be. There seems to be little doubt though, that the current set-up is unstable.
And whatever evolves from the ructions that seem about to befall the continent will surely be more stable, albeit less ordered, and that ought to be conducive for growth. And it is growth that drives metal demand.
Nowhere is this better illustrated than in the nickel market. Prices are languishing at US$16,825 a tonne, the lowest for three years because, according to Bloomberg, it was oversupplied by 14,600 tonnes in the first quarter.
Refined output has exceeded demand by 1.8 per cent this year so far, and has resulted in a 15 per cent increase in LME nickel inventory to 103,932 tonnes. Until prices drop even further and force capacity closures, this market will stay oversupplied.
And that logic applies to all the other base metals apart from copper. However, even that market will start to feel the pressure unless global growth rates increase. At least the low inventory levels in copper will provide support that is lacking in the other metals.
Having just bought the metal exchange at an eye-watering valuation no one is hoping more than the Chinese that the growth will continue. Otherwise it will look as if the metal exchange brokers have pulled off the deal of the century: for themselves.
Source >> www.minesite.com
*****
Buying The Market, Literally
Rob Davies
If you are not sure which part of the market is going to go up, then it makes sense to buy all of it. And that, literally, is what the Chinese have done, by buying the London Metal Exchange for £1.39 billion.
According the Financial Times that price is somewhere between 120 and 180 times last year’s earnings, which seems appropriate in a funny sort of way, since the exchange is 135 years old.
It is of course entirely sensible that markets migrate to where the demand is. In times past regional centres of metal processing, like Swansea, had their own metal exchanges, but business migration and technology subsequently resulted in London becoming the dominant centre for commodity trading.
Now that China accounts for 40 per cent of world metal demand it makes sense for it to own the exchange, even if it does not physically move.
And there was plenty of news flow this week to remind the market why the east is more important. US industrial production fell by 0.1 per cent in May, but during the same month inventories of copper in Shanghai fell to 130,143 tonnes. This is the lowest level this year.
It is true that concerns over slowing growth in China hit mining shares and pushed the LME index down one per cent to 3,210.7. Nevertheless, China is still growing, in marked contrast to some other parts of the world, most notably Europe.
And while the euro-drama keeps everyone transfixed, the ultimate outcome remains as unclear as ever. What does seem obvious, especially to Anglo-Saxon capitalists, is that the highly ordered structure of the eurozone seems destined to follow the Second Law of Thermodynamics and become disordered.
The elegant creation of bureaucrats and politicians united under the rules and regulations of Roman Law is about to be destroyed by the raw brutality of free markets under common law.
The concept that no one actually knows the right price of anything until tested by competing buyers and sellers is anathema to those that wish to control such matters. But it is the only one that works.
This resistance to letting markets determine the right price is making the whole process much more protracted than it should be. There seems to be little doubt though, that the current set-up is unstable.
And whatever evolves from the ructions that seem about to befall the continent will surely be more stable, albeit less ordered, and that ought to be conducive for growth. And it is growth that drives metal demand.
Nowhere is this better illustrated than in the nickel market. Prices are languishing at US$16,825 a tonne, the lowest for three years because, according to Bloomberg, it was oversupplied by 14,600 tonnes in the first quarter.
Refined output has exceeded demand by 1.8 per cent this year so far, and has resulted in a 15 per cent increase in LME nickel inventory to 103,932 tonnes. Until prices drop even further and force capacity closures, this market will stay oversupplied.
And that logic applies to all the other base metals apart from copper. However, even that market will start to feel the pressure unless global growth rates increase. At least the low inventory levels in copper will provide support that is lacking in the other metals.
Having just bought the metal exchange at an eye-watering valuation no one is hoping more than the Chinese that the growth will continue. Otherwise it will look as if the metal exchange brokers have pulled off the deal of the century: for themselves.
Source >> www.minesite.com
*****
