Commodities | Apr 27 2006
by Chris Shaw (Tokyo)
A recent development in commodity markets has been an increase in volatility, which simply means the size of daily movements in prices is growing larger. While higher volatility implies the risk of investing has increased, in the view of Kevin Norrish, director of commodity research at Barclays Capital, investors should take the view commodity prices are continuing to be set by market fundamentals.
Norrish made the comment at the Commodity Investment World conference in Tokyo yesterday as part of a broader overview of the outlook for commodities generally. He suggested the macroeconomic environment for commodity prices remains supportive, as global economic growth continues to be strong and interest rates are not yet at restrictive levels, meaning supply and demand continue to be the factors determining the level of commodity prices.
Looking at the supply picture, he noted for many commodities there is now little capacity to absorb any supply side shocks. Oil is an example, as spare capacity has fallen to as little as 1.5m barrels per day, while current stockpiles of industrial metals are at their lowest levels since the late 1980s.
He noted other factors impacting on supply include declining grades and reserves at producing mines and disruptions that are delaying supply increases, a situation he expects to continue going forward.
Norrish made the additional point the supply picture isn’t constant across all commodities, highlighting the level of central bank holdings means there is actually a large supply overhang in the gold market, while soybeans are another commodity where stockpiles are currently high.
Looking at the demand side of the equation, Norrish suggested while the level of demand growth is beginning to slow down it remains high in absolute terms. The issue of demand destruction remains, Norrish noting current high spot prices for gold are dampening some physical demand while prices of copper and oil are at levels suggesting there could soon be a demand response.
Having said that, Norrish added substitution is also now more difficult as the prices of substitute materials have also risen, so the demand destruction implied by high spot prices may not be as severe as would otherwise be the case.
Looking forward Norrish expects there will be more diverse performances across the commodities sector this year, though he notes the shape of the forward price curve in many markets implies market participants are expecting strong prices to continue for a number of years. He agrees with the view the run in commodities has not finished, suggesting the next bear market remains some time away.