Commodities | Sep 24 2008
By Chris Shaw
Commodity prices have been extremely volatile in recent trading sessions, and in the view of ANZ Banking Group senior commodity strategist Mark Pervan, a continuation of such trading is likely, as investor confidence remains shaky at best given the current financial conditions.
Pervan suggests the uncertainty in world markets and expectations of lower demand for commodities given weaker economic growth globally means downside risk for base metal prices, especially as LME stockpiles could move higher as funds and producers look to increase cash levels in the current market.
Among the base metals, he sees zinc as the most likely to deliver the best performance given news of production cutbacks in China and elsewhere. Overall, his outlook is for prices to weaken further in coming months, with aluminium the most likely to underperform if the oil price continues to fall.
Overall, Pervan suggests downside should be limited to some extent by the size of recent price falls, while nickel, lead and zinc should also see some support around current levels given all three are priced at levels near the top of their respective cost curves.
While some signs of improved US demand contributed to the sharp spike in the oil price over the past week, Pervan sees ongoing concerns about the strength of US demand as enough to see prices move lower over the medium-term. This outcome is supported by recent International Energy Agency and OPEC figures showing a further downgrade to annual demand expectations. The US dollar remains a key variable though, and Pervan points out further weakness in the currency could see the oil price push higher.
Some profit taking in precious metals seems likely in Pervan’s view given the extent of the rally in recent sessions, but again he sees the direction of the US dollar as the key over the medium-term. While the latest gains make further upside less likely, in the short-term he notes there remain doubts over the US financial rescue package. This should prompt some safe haven buying in gold in particular. Also likely to limit downside is an expected seasonal pick-up in demand in India as the fourth quarter wedding season approaches.
While lower oil prices pushed coal prices down last week, Pervan expects a bounce given the rebound in the oil price, especially as seaborne supply also looks likely to remain at tight levels. Taking a more medium-term view though, he expects prices to ease in line with the bank’s view of further weakness in the oil price.