Is this the return of the commodities bull?
Mar 27, 2009
"A wave of bullish sentiment" has swept the raw-materials markets, says Barclays Capital. The benchmark CRB index jumped by more than 7% last week and has hit a two-month high. Oil and copper have led the advance, reaching four-month highs above $50 a barrel and $4,135 a tonne respectively. The red metal has gained more than 30% this year. Softs have risen too, with corn and soybeans at five-week highs.
The recovery in risk appetite over the last fortnight has squeezed out short-sellers, while the US banking plan and the Federal Reserve's quantitative easing have fuelled hopes of a rebound in growth, and hence demand for commodities. The prospect of returning inflation and a weaker dollar has also prompted investors to opt for hard assets, says Morgan Stanley's Hussein Allidina. On the metals front, signs of improved demand from China – which accounts for around 30% of global consumption of base metals – has encouraged the bulls. Refined copper imports, for instance, doubled year on year in February.
Yet it looks as though investors in raw materials are jumping the gun. China's Strategic Reserves Bureau has been topping up the country's stockpiles. This has been the key driver of the recent rise in copper prices. But there has been scant evidence of "real demand", says David Wilson of Société Générale, which is hardly surprising as global manufacturing activity continues to decline. Standard Chartered says that a shortage of scrap copper has prompted China to boost imports of refined copper as a substitute. Chinese scrap copper prices have eased of late – "demand was not supportive of further price hikes" – after the shortage caused scrap prices to tick up. China certainly isn't going to save the world in a hurry: as Lex points out in the FT, Chinese steel prices have slipped further, coal sales have tumbled and power generation (a decent indicator of true economic growth) is still "anaemic".
What's more, says Standard Chartered, overall copper inventories have risen despite falls at Asian warehouses. According to Barclays Capital, North American copper consumption is still falling at a double-digit pace, while global zinc and aluminium inventories are rising. The current euphoria in the metals markets "could easily fade against more evidence of weak fundamentals", says Deutsche Bank. With the copper surplus climbing, it reckons the price will average just $2,646 in the third quarter. Similarly, while rapid supply cuts from oil cartel Opec have put the oil market on "a more solid footing", Deutsche thinks the weak global economy looks set to keep oil at an average price of $45 a barrel this year. As far as the International Monetary Fund is concerned, "commodity prices are unlikely to recover while global activity is slowing".
So it seems the market "is ignoring near-term bearish fundamentals", says Adam Robinson of investment management firm Armored Wolf, while at the same time pinning its hopes on the American plan to address toxic assets and the Fed's money-printing. But it will probably be months before it's clear whether the former can clean up the toxic asset problem and months before quantitative easing boosts economic activity and demand for commodities – if it can ward off deflation at all. Even if industrial commodities don't fall further, with the fundamentals in many markets still "very weak", says Barclays Capital, a sustainable recovery still looks some way off.
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