Bloomberg News

Commodities Rally From Worst Streak Since ’08 on Shortages

June 27, 2011

(Updates returns in fifth, sixth paragraphs.)

June 27 (Bloomberg) -- Commodities will rebound from the worst losing streak since the end of 2008 because shortages of everything from copper to palladium to corn will boost prices even if economic growth slows, should history be a guide.

The benchmark Standard & Poor’s GSCI index is heading for a second monthly drop, led by declines in silver, coffee and nickel. The last time that happened, the gauge surged 36 percent in the next six months. Speculators are holding a net 1.1 million U.S. futures and options contracts to bet on higher prices, 37 percent more than the average of the last five years, data from the Commodity Futures Trading Commission show.

“The long-term perspective is that many commodities have supply constraints,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama, and favors gold because it will gain from financial stimulus by central banks and inflation. “That’s an environment where you want commodities in your portfolio.”

The two-month slump in raw-materials mirrored declines in stocks, with almost $4 trillion of equity value erased since May 1 as the slowdown in economic growth threatens to curb profits. Financial assets also retreated as more than two-dozen countries and the European Central Bank raised interest rates to cool inflation and Greece sought aid to avoid becoming the first euro-area country to default.

The S&P GSCI fell 12 percent this quarter compared with a 4.7 percent decline in the MSCI All-Country World Index of equities. Treasuries returned 3.8 percent, a Bank of America Merrill Lynch index shows. The commodities index advanced 1.3 percent this year, beating stocks that are down 0.9 percent. Bonds returned 3.6 percent.

Silver Winner

Silver will be the biggest winner among 15 commodities in the second half, rallying as much as 46 percent by Dec. 31 to match the all-time high $49.79 set in April, the median in a Bloomberg survey of more than 100 analysts and traders shows.

While gold will have one of the smallest gains, its 9.9 percent advance means a record price of $1,650 an ounce, according to the survey. Copper will gain 11 percent to $10,000 a metric ton.

Corn and wheat will be the best agricultural performers, each rising 30 percent to $8.18 a bushel and $8.50 a bushel, the survey showed. Arabica coffee may rally 11 percent to $2.80 a pound, the survey shows.

Catalytic Converters

Farmers will reap too little corn to meet demand for a second year, leaving stockpiles at the lowest relative to use since 1974, the U.S. Department of Agriculture estimates. Supply of palladium will fall 112,000 ounces short of demand, enough to supply the global car industry with catalytic converters for a week, Barclays Capital says. There will also be a 728,000-ton copper shortage, equal to 3.6 percent of consumption and 18 times last year’s deficit, the bank forecasts.

The main brake on the decade-long bull market in commodities may be the economy. Japan entered its third recession in a decade, and the Australian economy shrank the most in 20 years in the first quarter. Federal Reserve policy makers cut their forecasts for U.S. growth this year to a range of 2.7 percent to 2.9 percent from 3.1 percent to 3.3 percent. The Fed will maintain record monetary stimulus to support a flagging recovery from the worst recession since the 1930s, Chairman Ben S. Bernanke said June 22.

“Without the Fed’s intervention, the economy will falter and commodity prices will drop,” said Michael Pento, the economist at Euro Pacific Capital in New York who correctly predicted the collapse in commodity prices in 2008. “Several European countries could be in a recession by the beginning of 2012. We’ve had a truncated and shallow recession and there’s still a lot of pain to come.”

Production Surplus

That may mean some commodities retreating again after they rebound. While nickel was expected to advance 11 percent to $24,500 a ton in last week’s survey, one carried out earlier this month predicted prices dropping as low as $20,000 by Dec. 31 because of an expanding production surplus.

Greek Prime Minister George Papandreou, after winning a confidence vote June 21, still has to push through budget cuts this week to secure financial aid. European leaders vowed last week to stave off a default as long as the cuts go through. Greece already has the world’s lowest debt grade assigned by Standard & Poor’s.

Economic pressure is building elsewhere. The 26 percent gain in commodity prices in the past 12 months contributed to accelerating inflation, spurring more than two-dozen central banks to raise interest rates, according to data compiled by Bloomberg.

Chinese Inflation

Inflation in China, the biggest consumer of everything from copper to wheat, exceeded the government’s target each month this year. Premier Wen Jiabao said June 24 that efforts to cool consumer-price growth were working.

Weakening economic growth has cut commodity demand before. Aluminum, copper, nickel, zinc, silver, platinum and palladium consumption fell in 2009 as the global economy suffered its worst recession since World War II, Barclays Capital said. That was preceded by speculators in U.S. commodity futures cutting their bets on higher prices by 95 percent in the eight months ended October 2008.

There’s no sign of that happening now. The combined net- long position rose in three of the last five weeks, data from the Washington-based CFTC show.

Economists don’t expect a return to the slump of 2008 and 2009 either. U.S. growth will accelerate to 3.2 percent in the next two quarters from 2.3 percent this quarter, the median of as many as 68 economists’ estimates compiled by Bloomberg show. The world economy will expand 4.3 percent this year and 4.5 percent in 2012, the International Monetary Fund said June 17.

Weaker Dollar

Commodities may also be boosted by a weaker dollar. The U.S. Dollar Index, a gauge against six counterparts, will weaken to 74.1 in the third quarter, from 74.8 so far this period, based on the median of eight forecasts compiled by Bloomberg. The Dollar Index and S&P GSCI have a correlation of -0.76, with -1 meaning they move in opposite directions all the time.

Some of the most accurate forecasters remain bullish on raw materials. Goldman Sachs Group Inc., which correctly predicted the slump in May, expects higher prices in six months for 17 of the 21 commodities it covers, a report June 14 showed.

Commodity assets under management climbed to a record $451 billion in April, up 56 percent from a year earlier, Barclays said last month. The figure doesn’t reflect the May slump, when the S&P GSCI fell 11 percent in five days, the worst rout since December 2008.

Grain Export Ban

Wheat as much as doubled in the past 12 months as drought and flooding from Canada to Russia to Europe ruined crops. While Russia lifts a 10-month grain export ban on July 1, weather is now threatening harvests in the U.S. and across Europe. Group of 20 farm ministers meeting in Paris last week passed on a French proposal to curb speculators in agricultural markets to finance ministers meeting in Washington in September.

Cocoa jumped as much as 45 percent in the past 12 months as a civil war curbed supplies from Ivory Coast, the world’s largest producer. Raw sugar more than doubled as shipping bottlenecks limited supply from Brazil and Thailand, the biggest exporters. Coffee gained as much as 98 percent because of a smaller harvest in Brazil and crop losses in Colombia.

Growth in copper and platinum supply is being curtailed by ores that yield less metal, as well as higher prices for labor and energy. The cost of mining copper in Chile, the world’s biggest producer, rose 20 percent last year, according to UBS AG. Northam Platinum Ltd.’s Zondereinde mine in South Africa has shafts extending as much as 1.4 miles underground.

“I still like the growth story,” said Michael Cuggino, who helps manage $13.5 billion at Permanent Portfolio Funds in San Francisco. “Commodity prices are going to continue to go higher. Worldwide, the economy continues to grow and monetary policy is going to stay relatively consistent with no changes.”

--With assistance from Agnieszka Troszkiewicz, Isis Almeida and Maria Kolesnikova in London, Kim Kyoungwha, Chanyaporn Chanjaroen and Luzi Ann Javier in Singapore, Sungwoo Park in Seoul, Ichiro Suzuki and Jae Hur in Tokyo, Debarati Roy and Yi Tian in New York and Jeff Wilson, Whitney McFerron and Elizabeth Campbell in Chicago. Editors: John Deane, Claudia Carpenter

To contact the reporters for this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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