Commodities | Nov 26 2010
By Chris Shaw
In what has been something of a recurring pattern this year, commodity markets in recent weeks have again been hit by broader financial and economic worries. But as Barclays Capital notes, this time it has come when the commodities sector is being boosted by both a second round of quantitative easing (QE2) and strong underlying commodity demand trends and US economic indicators.
This leads Barclays to suggest the re-emergence of sovereign debt issues in Europe would have to take a severe turn for the worse to upset the current commodity price uptrend. Evidence of the resilience of markets can be seen in the large build up in speculative net long positions in the lead-up to the latest round of quantitative easing, as since July there has been a large increase in speculative interest in the agricultural, energy and industrial metal markets.
As well, while China is introducing additional measures such as interest rate hikes to control its economy, Barclays suggests the outlook for growth and for commodity demand as a result still appear quite favourable. This leads Barclays to the view that price dips are buying opportunities at present.
One factor in support of this view is the improvement in US economic indicators, Barclays pointing out US oil demand growth looks to be accelerating to its highest level in the recovery so far with early November numbers indicating an increase of 3.6% in year-on-year terms. Year-on-year gains are similarly impressive in metal markets, while Barclays notes inventory levels for the metals remain at low levels.
Chinese data is also supportive, Barclays taking the view recent numbers for industrial production, fixed asset investment and consumer spending all indicate a bottoming of the government induced slowdown in August, with a pick-up in activity since that time.
The other point made by Barclays is higher interest rates in China won't necessarily lead to lower commodity prices, as over most business cycles it is in the mature phase of expansion when capacity constraints are the highest and interest rates are moving higher than commodity prices tend to make the largest gains.
China is lifting rates but starting from an extremely low base in real terms, but even as rates are being increased overall liquidity conditions remain relatively good according to Barclays. With there still being significant flexibility with respect to the speeding up of development in infrastructure spending and low cost housing to boost growth if needed, GDP growth in 2011 of around 9% should still be achieved.
Taking a longer-term view, Barclays suggests QE2 is likely to accelerate some of the rebalancing process between nations with a current account surplus and those that are heavily indebted. This process is viewed as a positive overall for commodities demand, as faster growing markets will increasingly come to the fore as higher intensity users of commodities.
In the view of Barclays aluminium, coal, soybeans and corn should all experience a rising intensity of use in coming years, with industrial metals in general gaining from emerging market growth over the next 10 years.
Among the agricultural markets Barclays expects growth in wheat consumption is likely to be the slowest of any of the commodities in its analysis, while that of sugar and cotton is expected to slow significantly over the second half of the next decade. In energy coal is the clear standout beneficiary thanks to Chinese and Indian demand, while Barclays expects emerging market demand for oil and natural gas to be relatively slow.
