The People's Bank of China has already been clamping down on credit growth, with shorter term market interest rates on the rise. The exchange rate has also been allowed to strengthen quite a lot in real terms.
The Fed also seems likely to be changing course on policy. It seems likely that tapering will come sooner than the polls of analysts are suggesting, who are perhaps burnt by their September calls.
The actions from these central banks are important for different reasons. I would argue that the macro-financial impact of Fed decisions are more important to metals and bulk commodities than the bottom up demand implications of a stronger US economy. The opposite is true for the PBC, with the impact of its movement more important to expectations for key consumption sectors in China.
Its also important to consider not just whether rates are going up or down, but what stage of the policy cycle we are in. For the Fed, the ending of QE its one very small step towards policy normalisation, which is expected to take years according to participants of the FOMC.
China has been raising interest rates for some time, with some structural reforms to banking markets also taking place. The cumulative increase in rates should act on more of a restraint on real activity in China, than the tentative steps by the Fed does in the US.
The bottom line is that it is unavoidably bad news for gold in particular. Slower growth in China and a likely stronger dollar should weigh on copper. PGMs should be more immune, but are perhaps better played as a relative bet rather than an absolute one. Iron ore and coal are much more bottom up driven markets, which with pricing largely a function of how well Chinese policy makers manage the slowdown in growth.
I tend to think that gold prices are for the most part driven by the same things that drive US bonds and the US dollar and subsequently you can peg expectations on gold around how those two variables might behave. At the moment, gold seems to be broadly in line with where bonds and the US dollar are, unlike previous points this year where there were clear diversions.
Its not that clear how a tack in Fed policy will impact longer term interest rates, which have already moved a long way. I think it would be fairly conservative to say that real yields will rise by another 50bps over next year and the dollar rise by ~2%. In this scenario gold would drop to $1100-1150oz.
It would be a challenge for PGM prices to completely shake of movements in gold, particularly now that investment demand is a bigger slice of the pie than it was 10-15 years ago. But as I wrote about here, platinum fundamentals still look good and should outperform gold. Same is even more true for palladium, which is one of the few metals to not suffer from a significant drop in prices in 2013.
For copper, Chinese tightening is a more important factor than a shift from the Fed, although that doesn't help either via a stronger dollar. Stronger US consumption (an non-declining EU consumption) do support the fundamental balance, although Chinese demand is the lynchpin, particular when supply growth is stronger.
It is true that Chinese consumption has been stronger than expected this year and deficits smaller. But even so, prices have still been weak.
In the last 10 years or so, its generally been stronger demand ex-China that has propelled copper to strong levels following a stabilisation in prices from restocking in China. But the key difference in 2014 is that mine supply is unlikely to be growing at the ~1-2% growth rates seen in those periods. This means that China will need to absorb an increasing amount of supply from the rest of the world.
The bottom line is, do you want to be relying on stronger Chinese interest when policymakers are trying to slow things down?
Iron ore is pretty much entirely about Chinese demand as seaborne supply ramps up. As this year has been so much better than expected and Chinese inventories are not particularly high, it seems likely that the market can tolerate lower growth and not be affected too badly from a price perspective. To be sure, steel production only has to grow 1-2% in 2014 and prices would remain at $120+. That may be clear short from current levels of ~$140t, but is not a bad result for producers.
Coal is perhaps more mixed. Thermal coal prices are currently strengthening, although this is partly seasonal and a function of a big destock in China in Q3. Prices are likely to be patchy in 2014, particularly if the recent signs of weakness in power generation continue.
Met coal has a number of factors in its favour coming from a depressed position. First, its going to be tough to satisfy any additional demand growth in China from domestic supply at current prices. Second, competition from other key importers should pick up as steel production improves. This should generate some price tension, although price gains of 10%-15% from the current $150t level is merely dragging you a little way out of the gutter.
