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Monday, 18 August 2008
Commodity prices likely to rebound
Crashing commodity prices have once again given ammunition to sceptics who believe the boom of recent years was a blip, but that view underestimates the demand and economic growth in the emerging world.
Commodity prices likely to rebound By Pratima Desai
Reuters August 17, 2008
LONDON: Crashing commodity prices have once again given ammunition to sceptics who believe the boom of recent years was a blip, but that view underestimates the demand and economic growth in the emerging world.
Corrections are inevitable in any uptrend and the natural resources sector is no exception, say investment managers who oversee funds in all asset markets, and who have no specific interest in talking up commodity prices in particular.
The caveat is a global recession, but that is unlikely given forecasts of 8 percent to 10 percent growth this year in China, the world’s fourth largest economy, despite the halt in much industrial activity during the Olympic Games.
“When you have a long-term uptrend, excesses build up along the way. We are witnessing a correction,” said Mark Mobius, executive chairman at Templeton Asset Management. “Demand for commodities will remain at a high level in countries like China and India. If we see a serious worldwide recession, then we will see the end of the commodities boom.”
New investment money, speculators piling in on expectations of strong demand and supply disruptions have all contributed to the frenzied buying of commodities, with many prices hitting record highs as recently as July.
But investors have retreated, fearing that the economic slowdown in the United States has infected growth in the rest of the world, and worrying that demand growth will collapse and seeing a rising dollar.
“Commodities can’t be completely immune to the fact that there is a global slowdown taking place,” said Robert Talbut, chief investment officer at Royal London Asset Management. “That doesn’t mean we should abandon commodities for the next five years. There are still very strong supply/demand dynamics in place for the next few years.”
The scale of the rout can be seen in the Reuters-Jefferies CRB index, a basket of 19 commodities, which has fallen below 400 points to its lowest level since April, a drop of about 17 percent since a record high of more than 473 in July.
Within the sector, oil is down about 20 percent since an all-time high above $147 a barrel on July 11.
Benchmark copper prices in London have fallen a similar amount since the metal, used widely in power and construction industries, hit an all-time high of $8,940 a ton on July 2.
“It’s a pause and not unexpected,” said Omar Kodmani, a senior executive at Permal Group. “We don’t think the long-term bull market is over.” But he added, “we have left the phase where it’s just a one-way ride.”
Gold, used by investors as a hedge against inflation, financial turmoil and global security risks, has also tumbled. Bullion prices have plunged almost 25 percent since a record high of $1,030.80 an ounce on March 17.
The cause of gold’s declines this week was the rallying dollar, which makes commodities priced in the U.S. currency more expensive for holders of other currencies.
Another reason was an anticipated sell-off by pension funds, which cut their commodity holdings to rebalance their portfolios because the value of their stocks and bonds had collapsed.
Some were unwilling sellers and many still aim to raise their allocations to commodities. Analysts think the average allocation to oil, metals and other natural resources could eventually rise to 5 percent from 3 percent.
Commodities have for some years have been used by pension funds as a way of diversifying their portfolios, but many also seek the high returns the sector can offer, given the strong demand outlook based on growing industrialization and urbanization around the globe.
In a sign of that demand, current copper stocks of about 154,000 tons - about three days’ worth of global consumption - are well below the 973,000 tons of stock in April 2002.
China, the top consumer of copper, accounting for about 25 percent of demand, has been absent from the international copper market in recent weeks, but is expected to return soon to replenish its stocks.
There are also huge difficulties in starting new production for many commodities, particularly mined metals. Supply disruptions can also pose problems.
China’s oil consumption is growing at a furious pace, partly because higher incomes often lead consumers to switch to cars from bicycles.
“The economic fundamentals in China and other emerging markets support oil at more than $100 a barrel into 2009,” said Francisco Blanch, head of global commodities research at Merrill Lynch.
1 comment:
Commodity prices likely to rebound
By Pratima Desai
Reuters
August 17, 2008
LONDON: Crashing commodity prices have once again given ammunition to sceptics who believe the boom of recent years was a blip, but that view underestimates the demand and economic growth in the emerging world.
Corrections are inevitable in any uptrend and the natural resources sector is no exception, say investment managers who oversee funds in all asset markets, and who have no specific interest in talking up commodity prices in particular.
The caveat is a global recession, but that is unlikely given forecasts of 8 percent to 10 percent growth this year in China, the world’s fourth largest economy, despite the halt in much industrial activity during the Olympic Games.
“When you have a long-term uptrend, excesses build up along the way. We are witnessing a correction,” said Mark Mobius, executive chairman at Templeton Asset Management. “Demand for commodities will remain at a high level in countries like China and India. If we see a serious worldwide recession, then we will see the end of the commodities boom.”
New investment money, speculators piling in on expectations of strong demand and supply disruptions have all contributed to the frenzied buying of commodities, with many prices hitting record highs as recently as July.
But investors have retreated, fearing that the economic slowdown in the United States has infected growth in the rest of the world, and worrying that demand growth will collapse and seeing a rising dollar.
“Commodities can’t be completely immune to the fact that there is a global slowdown taking place,” said Robert Talbut, chief investment officer at Royal London Asset Management. “That doesn’t mean we should abandon commodities for the next five years. There are still very strong supply/demand dynamics in place for the next few years.”
The scale of the rout can be seen in the Reuters-Jefferies CRB index, a basket of 19 commodities, which has fallen below 400 points to its lowest level since April, a drop of about 17 percent since a record high of more than 473 in July.
Within the sector, oil is down about 20 percent since an all-time high above $147 a barrel on July 11.
Benchmark copper prices in London have fallen a similar amount since the metal, used widely in power and construction industries, hit an all-time high of $8,940 a ton on July 2.
“It’s a pause and not unexpected,” said Omar Kodmani, a senior executive at Permal Group. “We don’t think the long-term bull market is over.” But he added, “we have left the phase where it’s just a one-way ride.”
Gold, used by investors as a hedge against inflation, financial turmoil and global security risks, has also tumbled. Bullion prices have plunged almost 25 percent since a record high of $1,030.80 an ounce on March 17.
The cause of gold’s declines this week was the rallying dollar, which makes commodities priced in the U.S. currency more expensive for holders of other currencies.
Another reason was an anticipated sell-off by pension funds, which cut their commodity holdings to rebalance their portfolios because the value of their stocks and bonds had collapsed.
Some were unwilling sellers and many still aim to raise their allocations to commodities. Analysts think the average allocation to oil, metals and other natural resources could eventually rise to 5 percent from 3 percent.
Commodities have for some years have been used by pension funds as a way of diversifying their portfolios, but many also seek the high returns the sector can offer, given the strong demand outlook based on growing industrialization and urbanization around the globe.
In a sign of that demand, current copper stocks of about 154,000 tons - about three days’ worth of global consumption - are well below the 973,000 tons of stock in April 2002.
China, the top consumer of copper, accounting for about 25 percent of demand, has been absent from the international copper market in recent weeks, but is expected to return soon to replenish its stocks.
There are also huge difficulties in starting new production for many commodities, particularly mined metals. Supply disruptions can also pose problems.
China’s oil consumption is growing at a furious pace, partly because higher incomes often lead consumers to switch to cars from bicycles.
“The economic fundamentals in China and other emerging markets support oil at more than $100 a barrel into 2009,” said Francisco Blanch, head of global commodities research at Merrill Lynch.
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