Raw materials had another strong year in 2007, with the benchmark CRB index gaining about 16% as oil, metals and some agricultural commodities surged.
For 2008, says Ambrose Evans-Pritchard in The Daily Telegraph, “the big unknown” is “whether the supply crunch will eclipse a likely US recession and all its knock-on effects”.
Base metals have come under pressure of late amid worries over the global economy, and hence consumption. Copper has lost 23% since early October and lead is 42% off its highs. But long-term futures contracts have continued to rise, with five-year forward copper and aluminium prices recently eclipsing record peaks.
That means markets are “looking past the short term” and factoring in an environment in which producers struggle to keep up with demand, says Barclays Capital. Long-term, metals’ prospects remain positive.
Morgan Stanley also suggests that the supercycle is far from dead: any decline in demand amid an American recession is likely to prove cyclical and short-lived, while supply-side constraints “are largely structural, foreshadowing higher commodity prices in the long run”.
But the extent of the downswing is unclear, with Barclays Capital noting that metals consumption should remain propped up by emerging markets, provided “global growth assumptions remain relatively firm”.
Given the murky near-term outlook, metals look far less appealing next year than agricultural commodities and precious metals. Gold’s fundamentals look encouraging, with mined supply stagnant and both jewellery and investment demand on the rise; with the dollar weak and the credit crisis far from over, the medium-term trend is up, says Barclays Capital, which expects gold to average $830 an ounce next year.
Silver should also benefit from investors seeking a safe haven, while RBC Capital markets says global demand looks likely to keep outpacing new supply. And don’t forget platinum, says Barclays Capital’s Paul Horsnell. With inventories falling to record lows and the market in deficit, investor and physical demand should underpin new highs next year.