Melbourne: Corn and soya beans have rebounded as reduced crop yields push US stockpiles to near five-year lows. Oil has reversed on US-Russian tensions. Nickel has turned after Xstrata Plc. closed a Dominican Republic plant.
The worst rout in the history of commodities may be ending, signalling a replay of the 2006 tumble that preceded a doubling of prices in the next 17 months as measured by the Standard and Poor’s GSCI index. Only this time, the driver is supply cuts rather than increasing demand.
Rebound time: The New York Mercantile Exchange Commodities, as measured by S&P’s GSCI index of 24 raw materials, had their fastest 30-day decline to 15 August, slumping 21% after peaking on 3 July. Photograph: Richard Drew / AP
Supply constraints are “coming more and more to the fore” and that “will separate the performance of individual commodities,” said Alan Heap, global commodity analyst at Citigroup Inc. in Sydney.
Commodities are in their seventh year of gains, fuelled by demand led by China and India and disruptions to mine and farm supplies. A rebound in raw materials from four-month lows may increase profits at BHP Billiton Ltd, raise costs at Nestle SA and stoke inflation, limiting the ability of central bankers Ben S. Bernanke and Jean-Claude Trichet to cut interest rates and revive growth in the US and Europe.
Oil is up 3% from a month low after rising 10% on concern supply may be disrupted by tension between Russia and the US over Georgia and Poland’s missile shield. The Organization of Petroleum Exporting Countries (Opec) may consider cuts at its 9 September meeting, Venezuela energy and oil minister Rafael Ramirez has said, and US petrol stockpiles are dropping. Oil ended at $114.59 (Rs4,996) a barrel on 22 August, down 22% from its record $147.27 on 11 July.
Investor Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said on 23 August that crude oil prices will climb.
“Over the course of time, it’s a bull market,” Rogers, 65, chairman of Rogers Holdings, said after an investor conference in Kuala Lumpur. While oil could fall to $75 or rise to $175, prices will appreciate during the next 10 years, he said.
Copper, after plunging as much as 20% from its $8,940 a tonne record on 2 July, has rebounded from a six-month low as output fell at BHP Billiton, the world’s biggest mining company, and Chile’s Codelco, the largest producer. Aluminium may gain as power shortages force producers in China to curtail output, said Barclays Capital, the securities unit of London-based Barclays Plc.
Xstrata, the fourth largest nickel refiner, said on 19 August the suspension of its operations in the Dominican Republic may last four months. The operations produce 29,000 tonnes of nickel a year, or about 2% of world primary nickel production.
Corn and soya bean, down as much as 37% from their peaks, gained the past two weeks as delayed plantings threaten to reduce US yields and export tax protests may disrupt supplies from Argentina, the second largest exporter of corn and third largest of soya bean. That would strain world cereal stockpiles that the UN’s Food and Agriculture Organization says are near a 30-year low.
Commodities, as measured by the Standard and Poor’s GSCI index of 24 raw materials, had their fastest 30-day decline to 15 August, slumping 21%, after peaking on 3 July.
Supply constraints come at a time of sustained demand in China and India, home to a third of the world’s population. China may spend as much as 400 billion yuan (Rs2.5 trillion) to stimulate the economy and ease monetary policy, said Frank Gong, head of China research at JPMorgan Chase and Co.
The nation’s factory and property spending accelerated through July, fuelled by rebuilding after the Sichuan earthquake, the statistics bureau said on 15 August. Exports surged and retail sales growth was the most since 1999.
Chinese demand may also increase as factories shuttered for the Olympics reopen. The economy expanded 10.1% in the three months through June.
India, which could emulate China in demand for raw materials, will grow 7.7% in the year to March, a government panel said on 13 August.
Not all investors are so optimistic. “The whole cycle that began around the turn of this century ended,” said Michael Aronstein, chief investment strategist at Oscar Gruss and Son Inc. in New York, who returned 15% a year in the 1990s managing commodity investments.
“Human ingenuity creates productivity, and the real price of almost everything that’s extracted or manufactured goes down over time. That’s the nature of human progress.”
Federal Reserve chairman Bernanke signalled last week that the central bank expects the commodity rally to ease. The Fed is keeping its target for interest rates “relatively low” because of “our expectation that the prices of oil and other commodities would ultimately stabilize, in part as a result of slowing global growth,” Bernanke said on 22 August in Jackson Hole, Wyoming.
“We’ve seen the end to the upward trend” for commodities, Nicholas Sargen, chief investment officer of Fort Washington Investment Advisors Inc. in Cincinnati, said on 22 August.
“The global economy is weakening, not just the US economy. All the evidence coming out of Europe is that the economy now is stagnating. Japan and parts of Asia are weakening as well. That’s just too powerful to be overcome.”
Countries that make up half the world’s economy face a recession, Goldman Sachs Group Inc. said on 21 August. The US, Japan, the 15-nation euro area and the UK are “either in recession or face significant recession risks in the months ahead,” Goldman’s London-based international economist Binit Patel said in a report.
A year since the US housing slump sparked about $500 billion in credit market losses for banks globally, the world’s largest economies are now stumbling as rising borrowing costs combine with high commodity prices.