Raw materials posted another strong overall year in 2006. Copper, nickel, lead and zinc reached record highs, with the latter gaining 137%, and soft commodities rose too. Orange juice hit a ten-year high and corn and soybeans jumped 80% and 140% respectively. But there’s been a rocky start to 2007. Copper slid 11%, depressing other base metals, and is a third below its May 2006 peak, while oil continued to fall to its lowest level in more than a year, fuelling worries over a slide in global growth. Is the commodities bull of the past few years ending?
Not for ages yet, says commodities guru Jim Rogers. Bull markets in commodities last between 15 and 23 years, he told The Daily Telegraph’s
Tom Stevenson, and there remains an imbalance between supply and demand. There are three billion people in developing Asia “who want to live like we do”, and there is no “significant new supply” in any raw materials market. During the previous bear market, low prices prompted producers to shut down capacity, so they are struggling to catch up with rocketing demand, says David Fuller on Fullermoney.com. We are in a “supercycle” where “supply inelasticity meets rising demand”.
For 2007, analysts expect further, albeit less spectacular, gains in commodity prices, providing support for the long-term bull case, says Kevin Morrison in the FT. UBS reckons demand for raw materials, measured by global industrial production, will climb by 4.3% in 2007 – down from 5.7% last year, but still exceeding the long-term average of 3% to 4%. Higher demand in the developing world, notably China, will offset the fall in demand from the US. Before Christmas, China’s Baosteel conceded a 9.5% hike in the price of iron ore with its suppliers, which suggests “the Chinese industrial sector itself sees little sign of any slowdown”, says Lawrence Williams on Mineweb.com. That bodes well for those base metals whose supply is constrained in the short term, such as nickel, zinc and lead. UBS foresees further gains for both metals, and Barclays Capital expects them to post the biggest rises in annual average price this year. Uranium is Scotiabank’s favourite pick given the tight market: it sees the price averaging $80 this year, up from $48 in 2006. Demand for copper is also likely to rebound as Chinese stockpiles are wound down and the country is forced to start importing again, says Robin Bahr of UBS.
Turning to energy, prices look set to rise, according to Barclays Capital: the market is exaggerating the importance of mild weather, and a slide in US oil inventories compared to seasonal norms suggests the market is tightening, even before the full impact of Opec’s production cuts is felt. Jeff Rubin of CIBC World Markets also highlights demand from China – expected to rise 6% this year – and lower output from Venezuela. “There won’t be an oversupply anytime soon.” Then there’s softs, Jim Rogers’ hot tip for 2007: “wheat, soya, corn and orange juice are still far, far below their all-time highs”. Gold also has further to go. Likely dollar weakness, lower mine supply and lower central bank sales bode well, says Neal Ryan of Blanchard & Company, while gold ETFs are interesting investors and consumer demand is growing developing countries. Ross Norman of Thebulliondesk.com says gold will hit its 1980 record of $850 an ounce this year.