Some lessons that the metals markets could take from the credit crisis

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Kevin Norrish – MD, commodities research, Barclays Capital (London) talks about the speed and the extent of the recovery.

HILTON TARRANT: Well, lots happening at the Mining Indaba down in Cape Town. Kevin Norrish is MD of commodities research at Barclays Capital, and joins us now from London. Kevin, you've just got back from the Indaba - how was the mood down in Cape Town, considering that last year when we spoke to you the mood was pretty sombre?

KEVIN NORRISH: Well, I think it has definitely improved a lot. Prices have recovered very strongly, the global economy looks a lot healthier than it did. China, I think, really has come to the rescue in many senses of the global metals industry with the strength of its economy in the spending packages that they've put in place, which are obviously very metals-intensive, and just in terms of hoovering up a lot of what would otherwise potentially have been very substantial surpluses. So I think the mood has improved a lot for those reasons in a difficult environment. It's not necessarily easy to get financing sorted out for projects right now, but it's much better than it was.

HILTON TARRANT: From what you've seen and heard, are a lot of people still surprised at the speed and the extent of the recovery that we have seen?

KEVIN NORRISH: I think so, although I think people are getting used to it now. I think the Indaba last year marked the low point in terms of sentiment and prices, and we've been recovering ever since. I think people have just realised the scale of the production cut-backs that we saw - very, very rapid, China obviously. I think we are also starting to see better signs in the OECD economies coming through now as well. People have taken that on board. I think there is some uncertainty about where we are headed, and there's obviously still a lot of risk out there, but I think people are now looking ahead, really, as to what happens next.

HILTON TARRANT: Kevin, your address entitled "Metals Markets: Beyond the Recovery" covered a number of issues. One of those is the lessons that the metals markets could take from the credit crisis. What are some of those?

KEVIN NORRISH: Well, as I said, and we've already talked quite a lot about China, China and the industrialising world generally - it's clear that demand there has reached critical mass and it's now big enough to offset problems that we had in OECD economies in terms of filling in the demand gaps; and that's one key lesson, I think. I think some of the other lessons are that the supply side is still under a lot of pressure here. All through last year and the early part of this year we've had supply issues still, technical problems which have constrained output growth in parts of the world like Latin America and Australia. Those things haven't really gone away. And I think the other thing is that we've seen very strong recovery in energy markets as well. So, as far as miners are concerned, I think the debate at some stage over the last few years has been whether or not the big customer increases were simply cyclical and would end up going away once growth slowed down. And I think the strength of oil and gas prices, coal prices, are really showing us that a lot of those changes are structural and they are not going away, unfortunately. They are going to be with us for some time to come.
I think more broadly what we've seen is that commodity prices in the environment that we're in, with supply constraints and very strong industrial world demand, recover much more quickly than they used to. To me this means that going forward we probably have a much lower global speed limit in terms of growth that we are able to achieve, that is on the time... of a number of markets.

HILTON TARRANT: Kevin, let's go back to China. Some murmurs around the tightening of monetary policy and of lending criteria. What's that likely to mean for metals and metals markets if some of those tightening procedures are a little bit more aggressive than the markets are expecting?

KEVIN NORRISH: I think we've seen the markets getting a little bit concerned, a little bit nervous already this year with the hikes in the reserve requirement rate in China, for example. But let's keep this in perspective. The overall amount of lending that the Chinese government plans to do this year hasn't been changed. Interest rates, policy rates haven't been hiked, so we talk about a prettier ... environment in China. And the way I see this is the Chinese government has done a little bit of fine-tuning in order to slow down what was an explosive beginning to the year in terms of lending, and I think they probably wanted to make sure that the overall lending targets for the year weren't hit too quickly. And I think this is really a desire to make sure that growth doesn't go shooting massively above trend. I think the way the markets are looking at it is that they are concerned that these measures will result in Chinese growth falling below trend. I don't think that there's a very strong risk of that. We know that the Chinese government wants to keep the economy growing, we know that there's still a lot of the fiscal spending package that was announced last year that still needs to be spent this year. So I think the outlook is good, really.

HILTON TARRANT: There's concern around regulation in the US as well, the Obama administration seeming to send the same message around - how they are planning to regulate the financial services sector and potentially shift their focus onto commodity trading. Is that a risk for metals prices going forward?

KEVIN NORRISH: Well, we've seen the implementation of some legislation in the energy markets designed to place some limits on financial market activity in the oil market and some other US energy markets as well. I think that so far the markets have reacted in a fairly calm manner to what's been done, and there hasn't been panic, there hasn't been price volatility. In general I think we would support any moves which are designed to increase transparency and ensure liquidity is kept to good levels in these markets. That's the key thing for me. The main function of the commodities futures markets as they've grown up has been to assist in risk management. So producers, consumers and of course investors. And I think the key thing there is you want to have markets that are deep and liquid. And so I think we just want to make sure that as measures are put in place they don't interfere with the liquidity and the efficient working of these markets.

HILTON TARRANT: Kevin, this time last year there were a lot of sceptics around as to whether or not the commodity super-cycle still exists. Have we kind of consigned that to the rubbish heap or are we still within that super-cycle environment? Is the outlook for prices still positive?

KEVIN NORRISH: Yeah, I'm not sure - I think "super cycle" is a bit of an oversimplification. It's not necessarily something I would subscribe to. But what's very clear is that, if we look out over the next 10 or 15 years, the intensity of commodity demand relative to economic growth is going to be much higher than it has been over the last 15 or 20 years, simply because of what's going on in India and China and other parts of the world. And at the same time we are having problems in finding new deposits and in finding new oil fields, and in finding new copper deposits. And we've got production costs rising, and rising quite significantly as well. I think those three factors taken together do suggest that we're in for quite a long period where prices of many commodities, not all, are a lot higher than we've been used to.

HILTON TARRANT: Kevin Norrish is managing director of commodities research at Barclays Capital.