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Rapidly declining metal prices raise spectre of recession

The global economy is strong, but a plunge in base metal prices and rout in mining stocks is signalling the threat of a recession.

The U.S. slowdown is just one factor contributing to the weakness, but the decline in copper, zinc, aluminum and nickel could indicate something more serious.

"It is not to be taken lightly that these four metals are down, on average, a stunning 7.1 per cent for the month to date and are down an even more stunning 12.4 per cent for the year to date," said Dennis Gartman, editor of the Gartman Letter L.C. "Copper is the metal with the masters degree in economics, but the base metals in aggregate have a PhD."

Although copper often declines in response to a weak U.S. economy, a drop in all four metals tends to presage a global recession, Mr. Gartman said.

The base metal commodity markets have been preoccupied by the U.S. housing weakness and the credit crunch, while ignoring the underlying demand for metals from China and India, said Bob Tebbutt, vice-president of corporate risk management for Peregrine Financial Group Canada Inc. "I think the demand is still out there."

Still the price of copper has been weak despite strikes in Mexico, Peru and Chile. The sharp drop in nickel prices from about $24 (U.S.) a pound in May to a recent $12 range is a result of concerns about increased production from new mines, Mr. Tebbutt said.

"There has [also] been a steady outlook for substitutes," Mr. Tebbutt said. Lower-cost aluminum products are replacing copper, especially for home wiring, while plastic piping is being used in the construction industry, he said.

Still strategists are banking on continued global growth. "Even if the U.S. does have a recession, the impacts on metal markets will be relatively modest," said Alan Heap, a commodities analyst for Citigroup Inc. The recent 25-per-cent thrashing of the base metal stocks is a buying opportunity, said a report by CIBC World Markets Inc.

No economic data are scheduled for release today in Canada or the United States.

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