Friday, January 18, 2008

Commodity prices have brushed aside the escalating fears of a U.S. recession and stayed near record highs, leading a CIBC World Markets economist to suggest that the U.S. economy's importance in the overall global equation — and especially for resource markets — is waning.

“Whether the U.S. is heading for a recession or just a mid-cycle slowdown remains to be seen,” CIBC chief economist Jeff Rubin wrote in a report released Friday. “But the more important question for crude, base metals and other resource markets, is whether it really matters any more.”

A growing sense of gloom about the prospects for the U.S. economy has hammered stock markets this week. Canada's benchmark equity index has been hit particularly hard on the notion that a slowdown in the U.S. will soon spread to other countries and curb demand for Canadian natural resources.

However, Mr. Rubin pointed out Friday that commodity prices have stubbornly held their ground in the face of the stock selling: crude oil futures are trading at $90 (U.S.) a barrel while copper is worth $3.20.

The biggest factor behind the strength of commodity prices is the loss of the U.S. economy's importance to the global economy, Mr. Rubin said. In the late 1990s, the American economic growth accounted for nearly 30 per cent of global growth while today it accounts for only 10 per cent.

“And that loss is much greater when it comes to impacting resource markets,” he said.

Mr. Rubin made headlines last week when he forecast that Canadians will soon be paying $1.50 (Canadian) a litre for gasoline. His assertion that crude prices, which surged to a record high above $100 (U.S.) a barrel at the start of 2008, will likely hit $150 by 2012 is based on the belief that burgeoning global demand for will outpace supply.

On Friday, he pointed out that although the U.S. is still by far the largest global user of oil, its contribution to global demand growth in the last two years has been flat. Furthermore, the economist maintains that when pump prices in the U.S. hit $4.50 a gallon by 2012, American crude consumption will fall even further.

“More or less the same story can be told for base metals,” Mr. Rubin said. “While bearish reports on the U.S. economy can still unnerve base metal markets, there is little in the pattern of recent demand growth to substantiate such fears.”

American consumption of zinc and copper has dropped while aluminum and nickel has remained flat in the last five years. During that same time period, demand from China has jumped 20 per cent annually, making it easy to see why base metal prices have stayed high even as the U.S. economy heads into the toilet.