Commodities | Jun 02 2006
By Rudi Filapek-Vandyck
To market strategists at BCA Research the conclusion to draw from the renewed turbulence on commodity markets is that investors had simply taken too bullish a view, ignoring warning signals on the way up.
The result now is that an adjustment simply has to take place. Global economic growth has peaked, it will slow down from here. In case you still adhere to the long term bull theory of an awakening China, India and Brazil: you’re right, but economic growth will abate and China is no exception.
Let there be no mistake, BCA assesses, demand for commodities will retreat as China’s demand will slow down from now on. It’s just that the market, for reasons of a too bullish stance previously, has to adjust itself to the new situation.
Main themes from now on, BCA believes, is that earnings breadth within the sector is going to narrow while producers’ pricing power will remain under downward pressure. Add gradually abating demand from China, both from a cyclical perspective and because of government’s actions, and it is easy to see why BCA believes the correction in commodities may have a while to go yet.
There is a catch though with BCA analysts describing the current state of the commodity markets as "nosebleed territory", the analysts nevertheless also point out it is dangerous to bet against any "mania candidates".