Commodities: The big fall is coming…

Discussion in 'Commodity Futures' started by ASusilovic, Mar 18, 2008.

  1. Commodity prices are hitting new highs almost every day but get ready: the big fall is coming soon, writes David Roche, president of Independent Strategy, a London-based investment consultancy, in the Insight column in Tuesday’s FT.

    The volume of funds escaping risky assets and their derivatives in recent months has been enough to cause bubble-like euphoria in commodity prices. With global equity market capitalisation almost 10 times the notional value of commodity derivatives, the rush to commodities by investors has been like squeezing a quart into a pint pot.

    The speculative element in commodity markets has grown sharply; non-commercial trades now constitute more than half of all trading, with hedge funds the biggest movers into the market. And in 2007, global equity funds switched away from financials and real estate into commodities in a big way.

    But that’s about to change. Global growth is declining fast. Recession will ensue and no region or asset class will be immune from its ravages. Contrary to received wisdom, economic decoupling is unlikely.

    Early hopes that Europe might withstand the US downturn are foundering.

    This does not bode well for the globe’s two most important economic blocs nor for producers hoping for sustained strength in global demand. The US and western Europe account for 47 per cent of world GDP and more than half of global private consumption growth. A consumer recession in the US and EU will require an improbable 3-4 per cent rise in demand elsewhere if it is to be offset.

    Chinese demand has been the principal driver of commodity price increases in recent years, accounting for 50-100 per cent of the marginal increase in global demand in a wide range of commodities in the past five years.

    Having been a modest consumer of various commodities as little as a decade ago, China is now the world’s biggest net importer of an increasingly long list of metals. But about half of the commodities China consumes are really just used for processing into exports. Thus its demand for industrial metals and energy is linked intimately to the global consumption cycle. Indeed, since 2005, net exports have contributed more than two-thirds of China’s real GDP growth.

    But economic overheating will force the authorities in Beijing to tackle domestic inflation pressures just as the country’s main export markets go into a tailspin.
    Something is going to have to give. To tackle inflation, China’s monetary policy must be tightened further. And growth will be the fall guy. Already export growth is sliding as global demand drops off.

    Where does this leave commodities? Along with slowing global growth, we estimate that a 3 per cent point drop in China’s growth rate, from 11 per cent to 8 per cent, would remove the ex-ante global supply/demand deficit from energy markets and push most industrial metals, including steel and copper, into significant surplus.

    On that basis, we can expect the price for refined oil to fall 30 per cent and industrial metals by 20-30 per cent. The big fall is coming.
  2. Daal


    CRB tends to give in 20% during recessions. it should come down only 15% due growth from asia, buying opportunity for us
  3. usman88


    one simple question.

    why would OPEC and other non-OPEC producers let oil prices fall anytime in future? Their economies depend on oil. Why would they let supply keep up with demand in future?
  4. Why were they so dumb to let prices drop and get so low in the past?

    Oh, their economies didn't depend on oil back then. I see!

  5. loik


    High prices will encourage development of alternative energy sources!
  6. usman88


    you probably dont have any common sense
    oil prices have been rising over the last couple of years. Look at the broader picture


    that would take many years
  7. CRB is going to give back even more ... volatility goes both ways.

    Boom and bust is the name of the game in commodities
  8. MGJ


    Prices of the commodities "Live Cattle" and "Lean Hogs" are not hitting new highs almost every day.

  9. bettles


    Possibly this is because farmers are so fed up with the high cost of feed that they are selling their cattle and hogs quicker than normal, thus driving down prices?
  10. Who cares, just trade it. Stop predicting and start reacting. As trader's the only thought process should be is to correctly anlayze the current market right now, in the moment and be on rightside of the trade. We are trader's right not investor's?
    #10     Mar 20, 2008