Chicago: Commodity markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials.
The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion (Rs13.3 trillion), or 43%, from its 3 July peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show.
The credit market seizure is squeezing speculators who drove commodities to record highs. Slower expansion in the US, China and India is also undermining prices of crude oil, which fell 36%.
“The day of steadily rising commodity prices is over,” said Chris Rupkey, New York-based chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. “A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.”
The CRB, which doubled from 2001 to a record 473.97 on July 3, may drop 15% this year, said William O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. Last time the index lost that much was 2001, when the US sank into a recession. It’s down 9% for the year.
A global slowdown may cause crude oil to plunge another 47% to $50 a barrel next year, New York-based Merrill Lynch and Co. said in a 2 October report. Goldman Sachs Group Inc. cut its forecast for copper next year by 12% to $8,265 a tonne and aluminium by 18% to $2,920 a tonne.
Corn may tumble as much as 15% to $3.87 a bushel in the next six months, and soya beans by 11% to $8.85 a bushel, said Don Roose, president of US Commodities Inc. in West Des Moines, Iowa.
Investors who embraced commodities as an investment class such as stocks and bonds, while demand from China and India eroded supplies faster than they were replaced, are now in retreat.
Outstanding contracts for 17 commodity futures traded in New York and Chicago fell 26% since a peak on 29 February to the least in two years, data compiled by Bloomberg show.
Net-long positions, or bets prices will rise, held by hedge funds and other large speculators fell to 7% of total open interest for futures on 23 September from 14% on 25 March, according to a 2 October report to clients by Barclays Capital.
Deutsche Bank AG, Pacific Investment Management Co. and ETF Securities Ltd led Wall Street in creating funds linked to commodities indexes, or so-called exchange-traded funds that trade such as stocks and buy raw materials such as gold, oil or cotton.
Investments in commodity indexes reached a record $175 billion at the end of June, Barclays Capital said. Saudi Arabian oil minister Ali al-Naimi said speculation, not supply and demand, was responsible for increasing prices.
Crude oil quintupled from July 2002 to a record $147.27 a barrel on 11 July. Gold more than doubled in the three years to 17 March, when it hit a record $1,033.90 an ounce.
Prices dropped since June as the US Dollar Index strengthened 9.6% in the third quarter, the most since 1992, economic growth slowed and bank losses from the collapse of subprime mortgages swelled to $586.6 billion, according to data compiled by Bloomberg. While US President George W. Bush signed into law a $700 billion bank rescue plan, the leverage that pumped up commodities is unlikely to return.
“Easy credit is done, it’s finished,” said Robbert Van Batenburg, head of research at Louis Capital Markets Lp. in New York. “I don’t think there’s going to be a quick end to this situation.”
Some investors and analysts expect commodities to rebound after the worst quarter for the CRB Index since at least 1956. The US bailout may revive speculation as the government buys troubled assets, and record swings in prices may lure investors.
Economic growth is slowing, but demand for food and fuel will continue to increase even if producers cut back supplies.
The drop in prices may lead to lower production and create shortages as soon as next year.
“It’s a wholesale liquidation of all assets as people became concerned about the economic outlook,” said Angus Murray, founder and joint chief executive officer of New York-based Castlestone Management Ltd, with about $1 billion in assets. “If this liquidation continues, commodities producers will stop producing. We’d end up with a severe shortage of commodities that would eventually boost prices back up again.”
Economists say US growth will slow to 1.5% next year from 1.7% in 2008, according to surveys compiled by Bloomberg. China grew 10.1% in the second quarter, against 12.6% a year earlier, and India grew 7.9%, against 9.2%.
Institutional investors withdrew $5 billion from commodity indexes during the third quarter, according to Barclays Capital. The combination of outflows and dropping prices pushed assets under management in indexes down 31% to about $120 billion, it said.
Every commodity in the CRB Index fell in the third quarter. The value of the 19 commodities fell to $374.8 billion on 1 October from $655.4 billion on 3 July, according to data compiled by Bloomberg.
Ospraie Management Llc., once the world’s largest hedge fund dedicated to natural resources, told investors on 2 September that it would close its largest pool after slumping 38.6% for the year. Boone Pickens said on 30 September that investors in its BP Capital Llc. hedge fund asked for the option to withdraw money after more than $1 billion of losses on energy trades this year.
Funds of hedge funds in Europe may receive redemptions of up to 25% of assets by the end of the fourth quarter, said Aoifinn Devitt, founder of London-based Clontarf Capital, which tracks about 20 commodity hedge funds. Funds of hedge funds are the largest investor group in the $1.9 trillion industry, according to Chicago’s Hedge Fund Research Inc.
“It’s difficult to be bullish on commodities,” said Peter Rup, chief investment officer at New York-based Orion Capital Management Llc., which invests in hedge funds. “When the money is put back into the markets, it will find its way into equities, not commodities.” bloomberg
Jeff Wilson in Chicago; Millie Munshi, Mark Shenk and Wendy Soong in New York; and Chanyaporn Chanjaroen and Brett Foley in London contributed to this story.