Friday, January 02, 2009
How commodities would perform in 2009
Friday, 02 January 2009
The year 2008 has come to an end and as we move ahead towards 2009, we take with ourselves the experience and historical movements and events in the financial markets. 2008 witnessed commodities like crude oil and other base metals making new all time highs and also breaking multi year historical lows in the same year. The year would rightly be called as the year of Financial Tsunami in Global Economy; clearing all that came its way for instance the bankruptcy of one of the oldest banks in the history of banking i.e. the Lehman Brothers. Following this were the
bailout packages offered in USA and other countries.
Talking about India, we saw the Rupee making new historical low against the Dollar. The year also saw numerous interest rate cuts in banks across various countries. As we step into the coming year, we go with the positive feeling hoping the New Year helps stabilize the market conditions and bring the world out of one of the deepest recessions it has ever seen.
PRECIOUS METALS: Safety amid uncertainty…
Gold has remained a synonym of wealth, a safe haven asset, an inflation and US dollar hedge for decades. In recent times it has cemented all of its above strengths by performing better in absolute terms and in relative terms against other asset classes.
As the world tries to come out of one of its worst recessions, gold prices should remain firm in year 2009 reflecting safe heaven risk premium and hence supporting strong investment demand. It could subsequently rise higher as major economies recover, triggering high inflationary pressures as a result of the monetary expansion amid depreciating currencies.
Though the world may be facing deflation now, it is unsure how governments will be able overcome it and even if they are able to, we might be left with high service cost of increased debt, higher inflation. The current monetary expansion and the escalating fiscal burden should trigger a surge in global inflation with a weaker USD, hence boosting commodity prices.
BASE METALS: More pain seen in the near term..
Global economic slowdown continues to worsen the demand outlook for Industrial Metals in 2009. Manufacturing conditions around the world have declined to unprecedented territory, industrial production has weakened substantially in most parts of the world and unemploymentis rising at an alarming rate.
Weakness seen in Auto industry and Construction has led to further deterioration in the base meals outlook. Rising inventories is an important feature, which has pressured prices in 2008, with demand not picking up in near term we expect the inventory levels to grow in coming months.
Substantial policy action by governments and Federal Reserves globally – including meaningful fiscal stimulus packages announced by China of $586 billion plan to improve national infrastructure and social welfare projects, should be particularly supportive of infrastructure-related metals usage, the benefits of these policies are unlikely to be felt in the markets much before 2010.
Moreover in response to the exceptionally weak demand conditions, sizable production cuts have been made across the metals and much more are expected in 2009. However later in the year with easing of credit crunch coupled with some stabilization in demand we could see a recovery in all metals.
ENERGY COMPLEX: Bottom is near, Rally is Imminent.
While perception of strong and sustained oil demand from China, India and other rapidly developing countries along with the much hyped fear of rapidly depleting known Oil reserves helped propel WTI crude oil prices to over $145/bbl in the first half of 2008, the dramatic collapse in world oil demand in the fourth quarter of 2008 as the global credit crunch intensified now threatens to push oil prices below $30/bbl in the near term.
The increasing likelihood of a prolonged global economic downturn continues to dominate market perceptions, putting downward pressure on oil prices. Oil demand growth in the United States and in OECD countries has fallen to recessionary levels in 2008, with US total petroleum demand currently down around 6.1% YoY. While oil demand estimates in China and the non-OECD countries have shown continued growth, recent economic indicators suggest that demand growth in these
countries is on the cusp of a sharp deceleration.
We tend to favor a rise in crude oil prices due to potential supply destruction if there is protracted recession. However if there are signs of global recovery, then too we favor a rise in crude oil prices as we believe the recovery in global economy will bring with it a sustained and stable demand from the developing world. We strongly feel the energy pack is likely to lead a rally of the entire commodity sector.
AGRICULTURE: Longer Term Bullish…
The Agricultural commodity complex with no exception saw weakening prices along with other commodities. One of the important factors for the fall in prices was the falling energy prices and also the weakness seen in the global economy during 2008, which still persist.
Energy has by far been the driving factor for the appreciation of prices in this complex mainly due to increase in the demand for bio fuels when energy prices were said to be skyrocketing. In true sense agricultural prices have managed to stay buoyant in times of global economic weakness, for instance during the recession period from Mar-Nov 2001 oil was down 29.62% followed by copper down 12.69%, while on the other hand looking at the agricultural complex corn only fell -3.70%, soybeans -2.74% and increase in demand for wheat saw prices appreciating around 5.53%.
But the scenario is different this time as agricultural commodities are linked to the energy complex considering the fact that biofuel demand constituted 29% of last 2 years of demand for corn, wheat sugar and vegetable oil. The correlation between fossil fuels and grains prices increased in the last five years and are expected to stay high in near future.
However downside though looks limited but still exists, as crop seasons come in near future the fight for acreages could possibly boost the demand for this complex and the picture is expected to be more clear hopefully around the 2nd half of 2009.
Source: CommTrendz Risk Management Services
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