Mumbai: The current crisis in the US financial sector might not affect the commodities market so much, but might actually result in positives as investors start concentrating on the fundamentals, says Paul Horsnell, managing director and head of commodities research at Barclays Capital. In an interview, he talks about where oil prices are heading, how he prefers platinum among all precious metals and his top picks in the sector. Edited excerpts:
How do you see last week’s events that shook the US financial system impacting the commodities market?
Precious pick: Barclays’ Horsnell says platinum is the metal that has major upside despite concern for growth because of falling vehicle sales. John Cobb / Bloomberg
In various ways. I think you have already had sentiments that had got very poor. But generally lots of markets were concentrating very much on demand-side implications and macroeconomic weakness. To the extent that the situation has reached, some kind of watershed, if anything, it may prove to be positive for commodities. The problem that was holding most of the commodity markets was that the markets were not focusing on the individual fundamentals of commodities. They were focusing purely on demand-side implications. The whole story about commodities in recent years has been that...it’s been supply problems that have helped cement and bring up prices across the board.
What are these positives that you see?
Positive in the sense that, before last week, the sentiment was very negative to begin with. Then it got much more negative. And if the perception develops that last week’s markets were a kind of turning point, then you would expect to see the sentiment improving enough to let the marlets focus on what’s really happening to supply and demand. So, it’s all very indirect effect.
Do you subscribe to the view that the credit crisis and last week’s events could see liquidity shrinking in the commodity markets too?
Liquidity started falling in July 2007. The patterns (of falling liquidity) across the markets were no different in the commodity market too. It wasn’t as if liquidity suddenly started falling, therefore, prices are going to fall much more. Liquidity started falling 15 months ago and two months ago prices underwent a major correction. So at this stage, I would probably say no.
Do you think that oil is an exception to this rule, given its recent volatility?
I think supply and demand has everything to do with it (oil price movement). For me, the major reason for the volatility in oil is that there is no consensus as to what is the long-run price of oil. Where is the price, which implies that in the long run, supply and demand can be matched. There is no consensus on that and sentiment on it can shift really quickly because if you look at what oil’s been through...its quite a revolution.
So, where do you see oil prices heading?
I think we sees scope for another bout of weakening this year. Nothing too traumatic, but enough to mean that the (October-December) quarter is spent crossing above and below 100 (dollars per barrel) more than once. As we move through next year, we do think that prices will consolidate, with perhaps the higher prices towards the end of the year.
What is your view on gold?
Among precious metals, we think platinum is the one that has major upside. We are not enamoured of silver, or palladium. For gold...I don’t think that gold is going to do anything dramatic, but certainly it will gain support from investors. But we don’t see gold leveraging to above 900 (dollars an ounce) in Q4. Not yet. Just enough to be supported, but not enough for a dramatic bull run.
So you like platinum in spite of slowing demand from the auto industry?
Yes. In platinum, there is certainly concern for growth because of falling vehicle sales. But the supply side is so weak and so dislocated that it’s another case of a race downwards between supply and demand and supply is winning.
Your top commodity picks?
The exposure we would like at the global level would be platinum. We see an upside in cotton over the short term. In base metals…there are positive fundamentals for tin and lead, but not much spark to get things moving yet. We find that it’s easy to see a market in a series of pairs and compare relative value…like corn, not wheat...relatively like gold, not like silver.