What's Ahead for Commodities

(page 2 of 2)

The nature of its infrastructure projects has changed from the massive dams and power stations of 10 years ago to electrical transmission lines into rural areas and high-speed trains, both of which require plenty of copper and other metals.

Copper prices have doubled to around $2.80 from $1.40 a pound at the start of this year, certainly on the prospect of an economic recovery, says Dave Meger, a metals analyst at PFGBEST. "Copper is a perfect example of a recovery-type commodity. It's used so widely across the board in the industrial sector."

Luther Lu, an analyst at Friedman Billings Ramsey (FBR) who covers coal, metals, and mining, anticipates a pullback in commodities but thinks certain products are more vulnerable than others. Copper prices should remain strong due to perceived scarcity and the likelihood that China is stockpiling some of it for new nuclear power plants and other aspects of its electrical infrastructure buildout program. Aluminum, by contrast, will pull back more because it's not in short supply and is in fact "infinitely recyclable, according to Alcoa (AA)," says Lu.

He's projecting an average price of $2.60 for copper in 2010 and an average price of 86¢ per pound for aluminum, vs. 89¢ currently.

Mine Strikes and the Metals Industry

Investors in metals need to be more aware of the impact of strikes at major mines around the world, which can potentially deplete inventories very quickly, says Holmes at U.S. Global Investors. He attributes the spike in nickel prices until recently more on a lingering strike at Canada's largest mine than on Chinese stockpiling. A strike that may begin Aug. 24 at the Impala mine in South Africa, which accounts for about one-third of that country's platinum production, could drive platinum prices much higher, he says. South Africa produces roughly 70% of the world's platinum supply.

Platinum and palladium have mostly been tracking equity and oil prices for most of this year, and are reacting to improvement in the broader economy, says Tim Murray, general manager of precious metals marketing for Johnson Matthey North America (JMAT.L) in Wayne, Pa.

Most of the U.S. demand for these metals is tied to their use in cleaning auto emissions, and "we're now starting to see hopeful signs that perhaps the auto market has bottomed and is beginning to recover here," he says. That's somewhat bullish for platinum and palladium, but not necessarily a buy signal, even though it tends to offer support to prices, he adds.

Platinum is now selling for roughly $1,250 an ounce, down dramatically from its peak around $2,100 in June 2008, but a nice recovery from a low of around $800 in the fourth quarter of 2008. Chinese jewelry demand for platinum has been strong this year because of the lower prices, but the Chinese will probably buy less as the price rises. Another reason for caution in platinum: Long positions by traders on the New York Mercantile Exchange and the total physical platinum and palladium being bought and held in Zurich bank vaults by platinum exchange-traded funds are near all-time highs, which means platinum could be ripe for a sell-off, though not a big one, says Murray.

Agricultural Commodities

Meanwhile, demand for agricultural commodities has strengthened despite the economic downturn, says Dan Basse, president of AgResource, an agriculture market research company in Chicago. He doesn't see a slowdown in lending in China affecting the longer-term dynamics of rising disposable income and higher caloric intake in that country.

Another weight on commodities, besides further economic weakness or dollar strength, is the sharply reduced amount of leverage being used compared with the six to seven years before the financial crisis. That's resulted in "tons of excess capacity for a lot of things [such as] gasoline and petrochemical refining," says Smith. "If it was leveraging credit that created that demand, that is not coming back easily."

Bogoslaw is a reporter for BusinessWeek's Investing channel.

Business Exchange

Track and share business topics across the Web.