The roller-coaster ride in commodities for the first six months of the year ended with a couple of big winners in gold and coffee. But the rest will be hoping for a second-half recovery. In many respects, commodities mirrored the volatility in equities, triggered by concerns about global trade, slower growth from China and European sovereign debt.
But analysts expect commodity prices to begin rising, because they believe the recent fall in prices was overdone and that the fundamentals remain strong. "The economic outlook is much brighter than the market is pricing in," said Hussein Allidina, the head of commodities research at Morgan Stanley in New York. "Demand in the third quarter will handily outstrip supply due to declining inventories. Broadly speaking, commodities are a buy at these levels."
Gold and coffee climbed more than 10 per cent, but most major commodities fell between 15 and 35 per cent in the first half of the year. The S&P GSCI Total Return Index of 24 raw materials has dropped 11 per cent since the end of March, pushed by declines in metals and crude oil. That marked the steepest fall since the fourth quarter of 2008. Even so, Mr Allidina is among those who believe macroeconomic fears are overblown. "We don't think China is facing a hard landing," he said. "We think it will see measured declines in growth. We think the European concerns are real, but do not expect them to derail the growth story, at least this year."
As part of a recent trend, commodities as a whole are trading in line with a broader class of risky assets, including equities and currencies, because large institutional investors are actively tracking them as a means of diversification. Oil As always, oil is the most closely-watched commodity in the Gulf, and most locals will take comfort in a relatively stable outlook. Crude oil fell 12.2 per cent for the first half of the year, but analysts do not expect to see significant volatility in the months ahead.
"The side winds are likely to continue as markets remain range-bound," said Stephanie Aymes, an analyst at Societe Generale in London. "I don't expect the trend to resume either upside or downside. On [West Texas Intermediate] crude oil, it's a big range, from $87-$90 on the upside to $68-$65 on the low side. If oil breaks this range, it may confirm a deeper correction, but for now I don't expect it to change."
London Brent crude traded at $71.94 a barrel late yesterday afternoon. Oil has retreated 9.7 per cent since April, the first quarterly decline since the last three months of 2008. The US is the world's biggest energy consumer, ahead of China, and its crude stockpiles as tracked by the US department of energy grew almost 12 per cent this year. The International Energy Agency, an adviser to consuming nations, forecasts that global oil demand will rebound 2 per cent this year after a two-year collapse that was the steepest since the 1980s. Global oil consumption will rise to a record 86.44 million barrels a day this year, according to the Paris-based agency.
Precious metals Gold bugs could scarcely have hoped for a better opening to the year. The metal climbed 10.4 per cent to an all-time high. On the spot market, gold was $1,188.75 in late afternoon trading yesterday. "It is only the investment demand that is helping gold sustain its gains. The physical demand is pretty flat," said Pradeep Unni, a senior analyst at Richcomm Global Services in Dubai. In India, the biggest gold importer in the world, the price of the metal has risen as much as 20,000 rupees (Dh1,561) in the past six months, which has tamed demand. "With prices so high, physical demand is very low in the Middle Eastern market as well," he said.
However, he noted that "with the current negative headlines about global economy, I see a further upside potential in gold". Mr Allidina was similarly bullish. "As gold touches its lowest close in over a month, the levels are a good entry point for fresh long positions," he said. Silver rose by 4.1 per cent in the first half the year and is expected to perform even better in the second half. On the spot market, it was trading at $17.68 an ounce late yesterday afternoon.
"In my opinion, gold is a speculative commodity, but silver has fundamental demand and is a more steady metal in terms of investments," Mr Unni said. Silver is used in many applications including biotechnology, pharmaceuticals and mobile phones, so demand is consistent. "There is a permanent demand for silver which makes it a better hedging tool than gold. It is a steady riser and doesn't fall that much," Mr Unni said.
Silver was quoted at $16.86 per ounce at the beginning of the year and rose 5.8 per cent in the first half to $17.84. It touched a high of $19.79 in the first half of the year. Construction Steel has climbed significantly, pushed higher by speculators and a change in contracts from a quarterly to an annual benchmark pricing system for iron ore, and there is considerable uncertainty about where it is heading.
"Steel prices in Egypt from January to July have increased by 16 per cent," said Rita Guindy, an analyst at EFG-Hermes in Cairo. "It is part of a global movement in steel prices." Raw materials prices are being negotiated now, and these should give an indication of where iron ore prices will go. Ms Guindy said the negotiations could result in steel-price changes ranging from a 25 per cent increase to a 50 per cent drop.
Copper fell by 14.9 per cent in the first half but could be ready for an upturn. "If you look at London Metals Exchange inventories for example, it has started to come off for this year," said Daniel Smith, a metals analyst at Standard Chartered. . In the first half of the year, three-month copper futures swung from a high of $8,044 a tonne to a low of $6,037. Three-month copper was trading at $6,605 yesterday afternoon on the London Metal Exchange (LME).
Aluminium dropped 16.7 per cent in the first half of the year, and Mr Smith expects it to stabilise at about $2,000 a tonne for the fourth quarter. "Actual fundamentals are in reasonably good shape. For most base metals from here at these prices, we're still bullish on medium-term view," Mr Smith said. Aluminium was trading at $1,968 in the late afternoon yesterday on the LME. Zinc was the laggard of the LME, and it is likely to maintain that status as exchange inventories of the metal have been rising since the fourth quarter of 2007, reaching their highest level since 1995. "There's little chance of improvement in this situation over the next two years," Mr Allidina said.
Soft commodities Coffee prices perked up 12.5 per cent in the first half of the year, mostly thanks to a sharp rise in the past month. The increase, which was felt in the Emirates as coffee retailers saw their margins trimmed, was largely fuelled by speculators and rumours about trouble with Brazil's harvest. Morgan Stanley maintains a short position on coffee, seeing the price rally as overdone, and prefers Robusta over Arabica, as the Arabica supply is expected to increase.
Sugar dropped almost 30 per cent from January to this month, but it reversed the decline last month as a result of lower-than-average rainfall in India. In addition, late rains in Thailand, which were followed by flooding, resulted in some crop damage. Monsoon rains were 13 per cent below average in India. Analysts expect the weather to improve and boost the supply of sugar. "The monsoon season is expected to advance in the coming days and cover the entire country by mid-month," Mr Allidina said.
He sees sugar as fairly priced at the moment.Rice fell 30.8 per cent for the first half of the year, while wheat fell 21.2 per cent. As the supply of corn falls, wheat is expected to become a substitute. * with reporting by Sarmad Khan halsayegh@thenational.ae
