Commodities | Feb 22 2008
By Chris Shaw
Even with no shortage of indicators suggesting the US economy is slowing there has not been any acompanying slowdown in commodity prices, Barclays Capital noting supply side concerns have contributed to price strength and driven gold, platinum, oil and soybean prices to all-time highs this week.
With grain prices also stronger Barclays suggests the implication is investors are not convinced a slowing in global growth will translate into lower commodity prices thanks to the structural shifts of the past couple of years. These shifts have seen developing nations contributing to commodity demand growth at the same time as supply constraints are increasing, the recent price gains suggesting these are becoming a bigger issue than slower global economic growth.
Looking at the various sectors, the group suggests the recent strength in oil prices is partially a response to the weakness that preceeded it. Oil prices tested and failed at US$100 per barrel before and the failure at that level produced a sell-off that continued until solid buying emerged at levels a little below US$90 per barrel, helped by expectations OPEC was willing to defend the price at around US$85 per barrel.
The change in sentiment prompted a spurt of short-covering, reinforcing the group’s view shorting oil based on an expectation of slowing global growth is a risk as demand appears likely to remain solid. Consolidation in the high US$90 per barrel range appears the most likely short-term outcome in the group’s view, with a number of moves above US$100 likely.
Lost production has been the driver of the base metals suite, with aluminium seeing the most significant impact thanks to power generating problems in South Africa. While a slowing in global growth would normally suggest underperformance in base metal prices Barclays takes a similar view to the oil market in suggesting shorting the market at present is not recommended given the ongoing supply side issues.
On fundamentals copper looks the best placed for gains in its view as a significant market deficit appears likely to form in the current half, which should be enough for prices to again test all-time highs. The balance of risk in the aluminium market also appears weighted to the upside as production losses continue to increase, while tin inventories are seen as tightening further and this should support higher prices.
A gradual pick-up in stainless steel activity should see the nickel price push higher in the first half of 2008 but Barclays is not so positive on zinc given its weak market balance, which it suggests will see prices fall below recent support at around US$2,200 per tonne.
The South African power supply issues are similarly positive for precious metal prices as production is likely to be impacted for some time, with platinum the most at risk to lost output. Similar supply side interupptions should also prove supportive for gold prices in the group’s view, especially as investment demand remains solid even at higher prices.
Risk appears to the upside across the agricultural sector as well in the group’s view thanks to low inventories and increasing demand not only from the food sector but also from the energy sector as buyers look for alternative sources for fuel.
Barclays expects corn prices to move higher given this scenario, while lower production also puts something of a floor under soybean prices. Wheat prices have gained from poor weather conditions and this trend appears likely to continue, the experts believe, while reduced growing acreage in the US and stronger demand from China is expected to support the cotton price.
