Traders stand outside the open outcry pit following a trading session at the London Metal Exchange. Most of the major metals traded on the LME are now trading at levels not seen since the global financial crisis of 2008-2009.

By Andy Home /London


Copper’s there. So too are aluminium and nickel. Tin was there last month. And as for iron ore, well, it’s already gone there and beyond.
As industrial metal prices sink ever lower, the historical reference point becomes ever starker.
Most of the major metals traded on the London Metal Exchange are now trading at levels not seen since the Global Financial Crisis (GFC) of 2008-2009.
The two exceptions are lead and zinc, which are “only” trading around five- and two-year lows respectively.
But are things really that bad?
Leaving aside Greece, banks are not failing, credit is not evaporating and industrial production is not imploding.
Global manufacturing activity is at best moderate, at worst mediocre, but certainly not critical.
History is not repeating itself, but it may be rhyming, since metals are being hit by another toxic bear cocktail of negative fundamental and financial drivers. But they are different this time around.  Indeed, the current slow-motion collapse in metals, and many other commodities, might best be understood as the great unwind of the last crisis.
This time around concerns about demand are all about China.
It’s easy to forget that it was China that single-handedly helped drag metals off the floor in early 2009.
While Western central banks were fighting the fires raging across the financial system, China’s response to global crisis was to unleash an unprecedented programme of infrastructure spending. New roads. New airports. New railways. New homes. And new power lines to connect everything.
All amounting to a huge demand boost, which benefitted both Chinese and non-Chinese producers of everything metallic. Copper got an extra boost when the Chinese government stockpile manager, the State Reserves Bureau (SRB), let it be known it was a buyer at what were then the lowest prices since the middle of the decade.
Fast forward six years and China is now correcting the excesses of that spending binge with metal usage now being slowed by the bursting of a property bubble and seemingly interminable corruption investigations at state power companies.
You don’t have to agree with Goldman Sachs’ contention that Chinese metals demand experienced a hard landing in the first half of this year but it’s evident that the previous driver of global demand growth has at the very least shifted down several gears.
The official purchasing managers index is indicating anaemic manufacturing growth. The alternative Caixin index, skewed towards smaller companies, has been indicating contraction for five straight months.
The impact on metal pricing, already severe in simple demand terms, is being amplified by the divergence with a relatively robust US economy and the resulting strengthening of the dollar.
Another major difference this time around is the supply response.
Such was the demand shock of late 2008, when the US government went from supporting Wall Street to supporting its automotive companies within the space of a few months, that suppliers had no option but to slash production.
World steel production, for example, slumped by over 20% in the first half of 2009. Now, however, slowing or even falling off-take in China has wrong-footed producers.
The most glaring example is iron ore. “Peak steel” has arrived several years earlier than expected and precisely at a time when the majors were still ramping up capacity to meet it. The result is a bloody war of attrition for share of a shrinking market.
Copper producers, too, have spent several years investing in expansions and new mines to catch up with a rate of demand growth that now looks unlikely to materialise, at least in the short term. Part of the problem is that the composition of supply in many industrial sectors has changed since 2008-2009. Indeed, the GFC itself caused production capacity to shift further away from the old industrial world to the new industrial world.
In September 2008, the month that Lehman Brothers went bust and the financial crisis exploded, China accounted for 36% of global steel and 34% of global aluminium production.
In June this year those ratios were 51% and 56% respectively.
The economics of much of that capacity are profoundly problematic with many older plants being kept afloat by local government subsidies.
Non-Chinese producers are understandably reluctant to reduce supply while higher-cost operators, be they Chinese aluminium smelters or nickel pig iron furnaces, don’t.
The result is a conspicuous lack of supply response to falling prices.
This of course creates more surplus and more downwards pressure on prices, a negative feedback loop that is being reinforced by the fact that production costs are themselves caught in a deflationary cycle. But the current unwind goes beyond China’s influence on demand and supply.
It’s also about the unwind of money in the commodities space, both in China and the rest of the world.
The great “made-in-China” bull run of 2009 fuelled the fund fires. A steady drift of heavy-weight funds into commodities in search of diversification of returns accelerated when the likes of copper became what was in effect a one-way bet on higher prices.
That trend has since gone into reverse. The immediate post-crisis world was one of positive correlations, undermining the arguments for commodities as a portfolio diversifier, while the cross-sector price slide of the last year has generated only negative outright returns.
Managed money in commodities mushroomed from just over 200bn dollars at the time of the Lehman Moment in 2008 to almost 440bn dollars in the third quarter of 2012, according to estimates from Barclays Capital.
As of the first quarter of this year, that figure had shrunk to just $260bn.
Much of this money was long only, meaning a massive removal of natural length in the markets.

Andy Home is a columnist for Reuters. The opinions expressed are his own.