Tuesday 7 October 2008

Commodities Hit by Sharp Decline as Speculators Exit, Growth Slows

Commodities markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials.
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Guanyu said...

Commodities Hit by Sharp Decline as Speculators Exit, Growth Slows

Bloomberg
7 October 2008

Commodities markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials.

The value of the 19 commodities in the Reuters-Jefferies CRB Index fell US$280.6 billion or 43 per cent from its July 3 peak, a loss larger than their total worth two years ago.

UBS, the bank that bought Enron Corp’s energy unit in 2002, plans to exit most commodity trading.

About 15 per cent of investors in Boone Pickens’ BP Capital hedge fund are likely to want their money back.

The same credit market seizure that led to last month’s bankruptcy of Lehman Brothers Holdings and the forced sale of Merrill Lynch is squeezing speculators who drove commodities to record highs.

Slower expansion in the United States, China and India is also undermining prices of oil, which fell 36 per cent, and corn, down 43 per cent.

“The day of steadily rising commodity prices is over,” said Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi UFJ. “A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.”

William O’Neill, a partner at Logic Advisors, said the CRB Index, which doubled from 2001 to a record 473.97 on July 3, might drop 15 per cent this year.

The last time the index lost that much was 2001, when the US sank into a recession.

It is down 9 per cent for the year.

A global slowdown might cause crude to plunge another 47 per cent to US$50 a barrel next year, Merrill Lynch said on Thursday.

Goldman Sachs Group cut its forecast for copper next year by 12 per cent to US$8,265 a tonne and aluminium by 18 per cent to US$2,920 a tonne.

Corn might tumble as much as 15 per cent to US$3.87 a bushel in the next six months and soya beans by 11 per cent to US$8.85 a bushel, said Don Roose, the president of US Commodities.

Investors who embraced commodities as an investment class such as stocks and bonds while demand from China and India eroded supplies faster than they were replaced are now in retreat.

Copper fell as much as 5.3 per cent yesterday, soya beans 5.8 per cent and palm oil 10 per cent as the rout deepened.

Outstanding contracts for 17 commodity futures traded in New York and Chicago fell 26 per cent from a peak on February 29 to the fewest in two years.

Futures, where a US$12.50 deposit could control a US$100 barrel of oil, allowed Pickens to earn US$1.4 billion in 2005, Institutional Investor’s Alpha magazine estimated.

Michael Farmer and David Lilley at RK Capital Management saw their Red Kite Metals fund in London gain 145 per cent from inception in 2005 through the end of last year.