Commodities | Aug 14 2009
By Chris Shaw
Barclays Capital believes there is mounting evidence the global recession is over, which would signal a phase of rapid growth in OECD industrial metals and energy demand is imminent. As this plays out the group therefore expects the upward price trend in commodity markets to continue.
There are two major reasons behind the group’s bullish view, the first involving China but the other taking account of developments elsewhere in the world. With respect to the former, Barclays notes the market expects Chinese demand for commodities to be weaker in the second half of this year, largely given the strength of demand in recent months as the nation’s stimulus package has flowed through to the broader economy and given the potential for monetary policy to be tightened as the economy gathers pace.
The latter would suggest the government has fully disbursed its planned investment spending, but as Barclays points out it would more likely be an indication the actual cash allocation has been completed rather than the spending itself as this is likely to take several more months.
As well, Barclays notes there are signs the recovery is in fact stronger than had been expected as steel mills are lifting utilisation rates and there is evidence of a pick up in real estate buying. As a result, the group suggests concerns about the weakness of Chinese demand over the rest of this year may in fact be overdone.
In the rest of the world the signs are also improving as Barclays notes US order levels for aluminium products, which it suggests is a good leading indicator of demand for the metal, have now risen for five straight months for the first time since such data started to be published in 2001.
At the same time, spot copper premiums are also rising in Europe despite this being typically a quiet time in the market, while order levels are trending higher across a wide range of products. All of this suggests OECD inventory rebuilding is under way and this will be positive for demand generally and will help offset any demand weakness from China if it in fact emerges.
Put together, Barclays remains of the view the trend in commodity prices in coming months remains an upward one as the global economy gradually emerges from its recession. Looking at different sectors of the market the group suggests while the front end of the oil price curve is showing some weakness at present, this is offset by strength in outer periods, which supports ongoing gains in prices.
Among the base metals, copper and nickel are finding additional support from supply disruptions, which is particularly important for the copper market given it already has low stocks and tight supply. For gold the price action is still reflecting moves in the US dollar but Barclays suggests sentiment remains positive, as evidenced by fresh long positions in futures markets.