LONDON (Reuters) - Crashing commodity prices have once again given ammunition to sceptics who believe the bull-run of recent years was a blip, but that view underestimates demand and economic growth in the emerging world.
Corrections are inevitable in any uptrend and the natural resources sector is no exception, say investment managers who oversee funds in all asset markets and who have no specific interest in talking up commodity prices.
The caveat is global recession, but that is unlikely given forecasts of 8-10 percent growth this year in China, the world’s fourth largest economy, despite stalled activity during the Olympics.
“When you have a long-term uptrend, excesses build up along the way. We are witnessing a correction,” said Mark Mobius, executive chairman at Templeton Asset Management.
“Demand for commodities will remain at a high level in countries like China and India. If we see a serious worldwide recession, then we will see the end of the commodities boom.”
New investment money, speculators piling in on expectations of strong demand and supply disruptions have all contributed to the frenzied buying of commodities, many of which hit record highs as recently as July.
But investors have retreated on fears that economic slowdown in the United States has infected growth in the rest of the world, worries that demand growth will collapse and a rising dollar.
“Commodities can’t be completely immune to the fact that there is a global slowdown taking place,” said Robert Talbut, chief investment officer at Royal London Asset Management.
“That doesn’t mean we should abandon commodities for the next 5 years. There are still very strong supply/demand dynamics in place for the next few years.”
NO LONGER A ONE-WAY TICKET?
The scale of the rout can be seen in the Reuters-Jefferies CRB index, a basket of 19 commodities, which has fallen below 400 points to its lowest level since early April, a drop of about 17 percent since a record peak above 473 in early July.
Within the sector, oil is down about 20 percent since an all-time high above $147 a barrel on July 11.
Benchmark copper prices in London have lost a similar amount since the metal, used widely in power and construction, hit an all-time high of $8,940 a tonne on July 2.
“It’s a pause and not unexpected,” said Omar Kodmani, a senior executive at Permal Group. “We don’t think the long-term bull market is over ... but we have left the phase where it’s just a one-way ride.”
Gold, used by investors as a hedge against inflation, financial turmoil and global security risks, has also tumbled.
Bullion prices have plunged almost 25 percent since a record high of $1,030.80 an ounce on March 17.
The strong trigger for gold market losses this week was the rallying dollar, which makes commodities priced in the U.S. currency more expensive for holders of other currencies.
Another reason was an anticipated sell-off by pension funds, which cut commodities to rebalance their portfolios because the value of their stocks and bonds had collapsed.
Some were unwilling sellers and many aim to raise their allocations to commodities. Analysts think the average allocation to oil, metals and other natural resources could rise to 5 percent from 3 percent.
Commodities have for some years have been used by pension funds as a way of diversifying portfolios, but many are after the high returns the sector can offer given the strong demand outlook based on industrialisation and urbanisation.
Copper stocks at around 154,000 tonnes — about three days global consumption — compare with 973,000 tonnes in April 2002.
Top consumer China, which accounts for about 25 percent of demand estimated at around 18 million tonnes, has been absent from the international copper market in recent weeks, but is expected to return soon to replenish stocks.
There are also huge difficulties in bringing on new production for many commodities, particularly mined metals.
Supply disruptions are also a problem. Losses in previous years have been offset by using stockpiled material, but inventories though rising are at historically low levels.
“Everyone is focused on demand at the moment but we think production problems will underpin prices,” said Michael Lewis, head of global commodities research at Deutsche Bank.
China’s oil consumption is growing at a furious pace, partly because higher incomes mean a switch to cars from bicycles.
“We have started to see some demand for oil curtailed in OECD countries,” said Francisco Blanch, head of global commodities research at Merrill Lynch.
“(But) the economic fundamentals in China and other emerging markets support oil at more than $100 a barrel into 2009,”