Connecting the dots sounds like a child’s game, but it’s also a useful tool to aid investment decisions – and right now the economic dots are forming a pattern which points to better-than-expected commodity prices.

China’s growth rate in the face of US trade sanctions is the key to understanding why the good news about commodities outweighs the bad despite an outbreak of recession fever in the US, a slowdown in Europe, and a modest slip by the Australian market.

What happens in the US and Europe is important but for Australian mining companies it’s the health of the Chinese economy which is of immediate interest and it’s in China that the worst of last year’s trade-war induced collapse of confidence is passing. In its place, demand for raw materials is rising to satisfy a fresh burst of infrastructure investment.

Bumping into a stronger Chinese economy is the issue of shortages and outages which have drained stockpiles of key metals such as copper, zinc and nickel, and boosted the price of iron ore.

Those outages, such as Brazil’s iron ore disasters, and supply shortfalls caused by seven years of under-investment in exploration and mine development, are some of the positive dots on the commodity landscape.

And it’s those “dots” which need plotting in a process which might not sound terribly sophisticated but is the same as a quarterly “dot-plot” conducted by the world’s most powerful bankers, the members of the US central bank, the Federal Reserve.

Last week’s $US18 an ounce jump in the gold price which took the metal back to around $US1318/oz, before easing to around $US1325/oz, is an example of how dot-plotting works because it was a game of dots which delivered the gold-price boost.

What happens at the Fed is that every three months the members privately make four marks (dots) on a graph to show where they think the Federal Funds interest rate will be at the end of the year, as well as over the next two years, plus a long-term dot.

When the dot-plot from last week’s meet of the Federal Open Markets Committee (FOMC) was released it showed that none of the 17 committee members expect an increase in the Fed Funds Rate this year.

In other words, interest rate rises are on hold, which is a green light for gold, and it could be seen immediately after the release of the FOMC dot points report.

Now for a broader game of dot-plot which might help investors see that there is less gloom in the system than they might have been imagining.

  • Macquarie Bank said in an edition last week of its Commodities Comment that a five-day fact-finding tour by its analysts of Chinese industries had shown a clear improvement in sentiment compared with a similar visit last November. The property market was “better than expected” and infrastructure spending was accelerating. Car demand was weak but overall metal demand was good, zinc because of supply bottlenecks and nickel because of a deficit in supply.
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  • Bloomberg Economics, Deutsche Bank and Morgan Stanley see stronger global growth ahead after the rockiest period since the 2008 financial crisis. “Put the Federal Reserve pause, trade truce and China stimulus together and we’re looking for a trough in the first quarter and very moderate pick-up ahead,” said Tom Orlik, chief economist at Bloomberg Economics.
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  • Gavyn Davies, a prominent London-based columnist for the Financial Times newspaper, said in a story published last week that Chinese growth was rebounding as the threat of a trade war receded and domestic stimulus took effect. “Assuming there is no return to escalating trade wars, the worst may be over for the Chinese economy.”
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  • Titanium dioxide and zircon prices are rising, another positive sign of increasing economic activity as they are basic materials used in paint (titanium dioxide as a pigment) and ceramic kitchen and bathroom fittings (zircon). Morgan Stanley, an investment bank, said last week that its recent survey of the titanium dioxide market in China led to a view that prices would continue to rise.
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  • Iron ore prices are expected to stay high this year after the Brazilian dam disasters which has led to a scarcity of high-quality ore, according to Maximillian Court, senior commodity analyst at the international consulting firm S&P Global Market Intelligence.
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  • Visible stockpiles of copper, zinc and nickel on leading commodity exchanges (as opposed to invisible material held smelters and manufacturers) are at multi-year lows, setting the scene for price spikes in the event of an outage of the sort seen in Brazil’s iron ore industry.
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  • Reinvestment in production capacity is under way in a number of industries, but mainly to replace ageing mines. BHP and Rio Tinto are developing new iron ore mines, but they will not add to overall capacity.
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  • Palladium prices have soared because of strong demand from the vehicle industry and limited supply from Russia, setting the scene for a classic “substitution boom” as car makers switch back to platinum in catalytic converters, an easy switch even if palladium is the preferred metal for petrol exhausts and platinum is preferred in diesel; and
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  • Mincor, as a final dot-point, because it’s worth noting a plan the small WA miner to restart nickel mines mothballed after striking a deal to supply ore to BHP’s nickel processing business which is enjoying strong demand as a supplier of nickel chemicals to battery makers.

In the year 2000 Mincor, under different management, was an early mover in the re-development of the Australian nickel industry. Buying old mines from WMC Resources, and enjoying a stellar ride on the first flush of the Chinese manufacturing and infrastructure building boom.

Whether Mincor’s revitalised nickel mining plan should be included as a dot-point in the overall recovery theme is an interesting discussion point – but it’s certainly a familiar blast from the past and perhaps a pointer to an improved future.