Commodities hit the skids

Aug 08, 2008

After scaling new highs in the first half, the commodities boom has started to flag as the global growth outlook has darkened. It seems we're at the start of a "lengthy medium-term correction" in raw materials, as David Fuller of Fullermoney.com puts it. The benchmark CRB index fell by 10% in July, its biggest monthly fall since 1980. Oil has dipped below $120 a barrel for the first time in three months and is down by around 15% from its peak. Copper is at a six-month low and corn has slid by 30% from its June record.

Raw materials are "falling off their peak", says Deutsche Bank. It sees oil heading back to $100 by the first quarter of next year, due to an increase in Saudi production, weaker demand in America and Europe – it is already sliding in the former – and cuts in fuel subsidies in emerging markets, which will lower demand there. Completely removing oil consumption subsidies in developing markets would slash Chinese demand by at least 10% in China and 3.5% worldwide, reckons Deutsche Bank. China's demand for commodities in general looks set to cool as the global slowdown has just begun to hit home – the fall in export growth over the past year "has been striking" – and China's exports are "largely metallic and energy-intensive", as Lehman Brothers notes.

Historically low supplies, however, point solely to gradual price falls, reckons Deutsche. As for soft commodities, grain prices are likely to come under further pressure now that it is harvest season and better weather has eased supply worries. Barclays Capital foresees wheat, now at $7.55 a bushel, averaging $7 in the fourth quarter, down from $10.25 in the first.

Related articles

FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.