Commodities | Jan 16 2009
By Chris Shaw
Commodities enjoyed a positive start to 2009, but as Barclays Capital points out, this is quickly fading. Sentiment continues to deteriorate on the back of weaker demand side signals, with energy and some base metals among the hardest hit this week. Economic data are not helping, as on the group’s forecasts, global GDP will contract in the June quarter.
Also not helping sentiment is the fact the rate of stock-build among the commodities has increased in recent months. This is evidenced by the current contango (forward prices higher than spot prices) in most markets. The group notes production cuts in a range of commodities are helping improve market balances, but until there are signs of improving demand, these cuts alone are unlikely to be enough to remove the pressure on prices.
The weaker prices have seen the amount invested in commodity markets fall significantly in recent months. Fourth quarter numbers for 2008 are showing a decline of 27% in quarter-on-quarter terms to US$154 billion. Energy markets saw modest net outflows thanks largely to index-linked withdrawals, while the agricultural commodities sector experienced outflows of almost US$800 million from ETPs and US$2.0 billion from indices.
The precious metals sector was the only one to see positive flows in the quarter thanks to strong ETP inflows.
In strategy terms, Barclays suggests any potential upside in the energy sector remains fragile, though longer-term the trend is likely to be towards higher prices. This is because the pace of supply side cuts has now overtaken that of the demand side, and demand itself is not getting any worse.
The recent gains in base metal prices can be attributed to index rebalancing, in the group’s view, and with this support dissipating it sees scope for further price falls given fundamentals continue to worsen. This means any price rallies in the sector should be viewed as selling opportunities, particularly as LME stocks continue to increase.
Copper is most at risk, in the group’s view, given its price remains well above current production costs. There is also a risk that the market will price in a further build up in stockpiles. In contrast, aluminium, nickel and zinc are already near their weighted average production costs, which suggests downside for these metals is more limited.
The gold price should continue to be driven by the actions of investors (as opposed to consumers). Barclays sees support coming from expectations of a weakening in the US dollar through the course of the year and a shallow recovery in the oil price.
Agricultural prices appear to have limited downside in the group’s view given the emergence of some supply side concerns, particularly for soy beans.
