Raw materials have been on a roll, with the widely watched CRB commodities index hitting a 14-month high as oil has continued its record-breaking run. Meanwhile, precious metals, notably gold and platinum, have jumped amid tight fundamentals and a weak dollar.
And there should be plenty of gains ahead for commodities, as veteran investor Jim Rogers, who correctly predicted the raw materials boom at the turn of the century, has pointed out. This bull market “will end sometime between 2014 and 2022”. Demand is booming as the developing world industrialises and supplies are struggling to keep up as investment in new capacity was neglected in the long bear market.
US oil futures have bubbled up to a new record above $93 a barrel as a new round of US sanctions against Iran have inflamed geopolitical tensions and exacerbated worries over supply in the tight market. US and European inventories have slumped and the squeeze is set to worsen in the fourth quarter, according to Kevin Norrish of Barclays Capital; Opec’s impending production increase will not be enough to rebalance the market. “The door to higher highs remains open.”
It’s a similar story for platinum. Producers have been struggling to meet the demand from the car industry – up by more than 240% since 2000 – as tighter emissions standards have increased platinum usage in autocatalysts, while industrial and electronic demand have also increased. Continual disruptions to production such as last week’s mine shaft closures in South Africa following fatal accidents are likely to produce a supply deficit this year instead of the modest surplus originally predicted. Throw in low above-ground stocks, and prices look set for further gains. “We are very bullish on platinum,” says Jon Bergtheil of JP Morgan; price dips are buying opportunities.
Meanwhile, Rogers is especially keen on agricultural commodities as unlike other raw materials they remain far below their all-time highs. Cotton, for instance, is still around 50% below its record peak. But this laggard among softs appears due for a rise.
As Lex points out in the FT, there is now talk of prices hitting $1 a pound, a substantial jump from the current level of $0.64. As more land in the US, the world’s biggest cotton exporter, is turned over to corn, less cotton is being planted, with acreage in the 2006/07 season down 29% on the previous year, and a further decline expected in 2007-08 as farmers are tempted to switch to wheat or soybeans by sharply rising prices.
Incomes in the developing world are on the rise, fuelling demand for clothing. China’s per-capita consumption jumped by a quarter to 6.4 pounds between 2000 and 2005, but there’s still some way to go, as Americans got through 38 pounds last year. The average Indian and Chinese person respectively owns two and four pairs of jeans; the average American nine, as Shruti Date Singh points out on Bloomberg.com. Consumption “is still breaking records year after year”, says Armelle Gruère of the International Cotton Advisory Committee (ICAC). This year will see world demand exceed supply by 1.6 million tonnes, the biggest shortfall in five years, says the ICAC. And as Lex points out, global inventories are shrinking. Investors can gain exposure to platinum and cotton through ETFs in London: ETF Physical Platinum (PHPT) and ETFS Cotton (COTN).