Greetings investors!
I鈥檓 fixated on metals prices for the foreseeable future, though I鈥檝e never had so much trouble seeing beyond the next 120 days in my life! Nevertheless, banks are suggesting 鈥榤oderate鈥� support for the next few quarters owing to continued consumption and demand for commodities as an investment.
The World Bank is projecting economic growth to hit 6% in emerging countries and slightly above 2% in developed economies. Apparently monetary and fiscal policies are working better in developing nations because they aren鈥檛 suffering from impaired balance sheets. As these countries continue to build, the industrialized nations will continue to mine and manufacture metals.
It鈥檚 interesting now to note the World Bank鈥檚 hindsight take on the financial crises. I鈥檝e been glued to the bank鈥檚 pronouncements since September of 鈥�08 because nobody else had the data set required to get a really accurate view of what was going on regionally and across the world. And it鈥檚 no less fascinating today. Eighteen months after the chips fell, the World Bank notes that commodity prices were already falling before the onset of the acute phase of the crisis. However, it notes that 鈥溾�� between July 2008 and February 2009, the U.S. dollar price of energy plummeted by two-thirds, and that of metals dropped by more than 50 percent, from earlier highs. Dollar prices of agricultural goods retreated by more than 30 percent, with the prices of fats and oils dropping 42 percent.鈥�
Now that鈥檚 what I call a plunge in pricing! However, the subsequent process of righting the boat was very odd and I suspect rather inequitable, thus: 鈥滵ollar prices of energy and metals com颅modities began to recover in March 2009, broadly in tandem with global economic activity. The price increases partly reflect the depreciation of the dollar that has since re颅versed almost all of the appreciation that was associated with the immediate flight of capital from the rest of the world to the United States. Indeed, the real local-currency price of inter颅national commodities (a measure that corrects for currency fluctuations and inflation differ颅entials) increased much less than dollar prices. For instance, although energy prices measured in U.S. dollars rose 57 percent between February and October 2009, the in颅crease over the same period in trade-weighted real local-currency terms was only 33 percent.鈥�
That鈥檚 pretty good arbitrage, I鈥檇 say. Ring the cash register, boys!
Back to commodities. Oil? Decreasing demand in 2010. 鈥� World oil demand, which grew on average by 1.7 percent a year over the 2000-2007 period, declined by nearly 3 percent during the last quarter of 2008 and the first quarter of 2009鈥攁 result of reduced economic activity and induced conservation and substitution toward other en颅ergy sources in response to high oil prices. Oil demand in OECD countries began declining in the fourth quarter of 2005 (when oil prices surged above $50 a barrel) and has been fall颅ing for more than four years now, with little or no growth expected in 2010. Demand in non-OECD countries also declined in the first quarter of 2009, but has since increased and is projected to resume its trend growth rate in 2010鈥�
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Aha, there鈥檚 that infrastructure build-out in the third world we鈥檝e been hearing about. Pricing power will remain in the hands of OPEC, according to the world鈥檚 bankers: 鈥淯nless significant additional reserves are discovered over the longer term, OPEC鈥檚 pricing power will continue to increase. Ulti颅mately, however, alternative energy sources such as coal, natural gas, nuclear power, and various renewables are likely to prevent real oil prices from rising without end. Industry estimates suggest that at current real oil prices, demand and supply should remain in balance for the foreseeable future.鈥�
On the financial front, Societe General notes in its much anticipated forecast that we are looking at 鈥渂inary inflation鈥� in 2010. Large output gaps persist in the developed economies, which should keep inflation well contained in 2010 and 2011, while there are mounting inflation risks in the emerging economies. A debate over the medium term inflation outlook is beginning 鈥渢o flare鈥�, however, and SocGen is of the view that inflation is very likely to be the next hurdle to overcome.
That should drive precious metals demand nicely, says the bank. PGMs meantime will fall back though platinum has some further upside scope. Lead will benefit from a rebound in auto sales, zinc will be constrained by a surplus, nickel should benefit from a predicted increase in stainless steel production, while aluminum and copper are looking good from the recent smelter restarts and greater global demand.
As for the popular fear of China 鈥榤elting down鈥� as a result of floating their currency, SoGen says that such a revaluation is more likely to support commodities then impede Chinese exports 鈥� and that any knee-jerk drop in prices in response to such a revaluation would offer a buying opportunity