New York / London: Commodities are heading for their best first half in 35 years. The next six months may not be as rewarding because record prices for oil, copper and a dozen other raw materials may crimp consumption and encourage growth in supply.
The 19 commodities in the Reuters-Jefferies CRB Index jumped 29% this year, the most since 1973 and more than any second-half gain in at least five decades, Bloomberg data show. High costs are slowing the pace of demand for petrol in the US, and gold purchases in India, the biggest buyer, plunged 50% from a year earlier. Producers are expanding supplies of wheat in the US and steel in China.
Energy conscious? In the US, the world’s largest energy user, the number of travellers over the 4 July holiday is expected to drop after fuel prices rose above $4 a gallon, according to American Automobile Association
“We’re near some kind of reckoning” in commodities, said Michael Aronstein, president of Marketfield Asset Management in New York, who returned 15% a year in the 1990s managing commodity investments. “I’ve probably been positive for seven years and this is the first time I think there could be really a dramatic secular reversal, that it’s not just a pull back.”
High energy costs will deter consumers and reduce second-half prices, after oil doubled in the past year touching a record $143 a barrel on Monday, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd.
In the US, the world’s largest energy user, the number of travellers over the fourth of July holiday will drop for the first time this decade, after petrol prices rose above $4 a gallon, motoring group American Automobile Association, or AAA, said on 26 June. Surging jet-fuel costs led to the failure of at least a dozen airlines in the past six months.
Demand is slowing for copper after the metal jumped 28% this year and reached $4.2605 a pound on 5 May, the highest ever, partly because of temporary supply disruptions in Chile, Peru and Mexico. China said on 10 June its copper imports fell 19% last month to the lowest since August. Buyers in China, the world’s biggest metals importer, are “price sensitive,” according to Freeport-McMoRan Copper and Gold Inc., the world’s second largest producer.
Gold demand from jewellers, the biggest users, has stalled since September, London-based UBS AG analyst John Reade said on 29 May. After reaching a record $1,033.90 an ounce on 17 March, gold will average $850 this year and $750 next year, he said. The World Gold Council said on 20 May that first-quarter demand fell to a five-year low.
Price gains that curb demand are encouraging producers. Katanga Mining Ltd restarted the largest underground copper mine in the Democratic Republic of Congo. The Lisbon-based International Copper Study Group on 28 April forecast a supply surplus this year and next.
The world’s wheat farmers will boost production by 8.2% to 658 million tonnes in the next 12 months, the International Grains Council said on 26 June. Wheat jumped to its highest price ever in February.
Output is gaining as economic growth slows. The odds of the US entering a recession in the next 12 months are 50%, according to the median forecast of 61 economists in a Bloomberg survey. Slowing global growth signals commodity demand will “soften,” the International Monetary Fund had said in March. During the last US recession in 2001, the CRB index plunged 16%. Commodities advanced this year during a “buying orgy” by investors seeking better returns than stocks and bonds, Paul Touradji, founder of the $3.5 billion hedge fund Touradji Capital Management, said in March.
The UBS Bloomberg CMCI Index of 26 commodities rose 32% this year to a record through 27 June. Equity markets trailed behind, as the Standard and Poor’s 500 Index dropped 13%. The US treasury bonds returned 2.1%.
Indexes linked to commodities took in an unprecedented $235 billion as of mid-April, according to Lehman Brothers Holdings Inc. The expansion is now slowing. Second-quarter net inflows into European exchange-traded products linked to commodities fell about 58% to $800 million from the previous quarter, Barclays Capital said. The prospect of increased regulation may also make investing in raw materials less attractive, said Dennis Gartman, whose $250 million fund in commodities, stocks and bonds has climbed about 30% since April 2007. On 26 June, the US House of Representatives approved a measure requiring the Commodity Futures Trading Commission to use its authority to curb excessive speculation in energy.
Investors may also shift away from commodities as an alternative to dollar assets. The US currency will end a two-year slide and advance 4.7% in the second half, according to forecasts compiled by Bloomberg. Lower prices would ease social tensions. The World Bank warned that 33 countries from Mexico to Yemen faced unrest because of higher commodity costs. The Egyptian government now spends about 5.5% of the national budget on bread subsidies and people were killed during food riots.
Some commodities may keep rallying. Floods across Iowa, the largest corn-growing state, and in Illinois and Missouri threaten to cut corn and soya bean plantings by 4 million acres, or 2.5%. The US department of agriculture releases its next crop forecasts on Monday.
Marianne Stigset in Oslo, Chanyaporn Chanjaroen and Rachel Graham in London, Jeff Wilson and Dale Crofts in Chicago, Stewart Bailey in New York, Claire Leow and Feiwen Rong in Singapore and Tim Culpan in Taipei contributed to this story.