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Commodities Bull Market Over?

Commodities / CRB Index Sep 01, 2008 - 10:37 AM GMT

By: Salman_Khan

Commodities Recent days have seen an intense debate on the hot topic of the year — commodity prices. We have seen commodities across the board tumble in the past few months. Pessimists have started writing obituaries for the commodity bull and pronounced an end to the ascent in commodity prices. The scale of the rout can be seen in the Reuters-Jefferies CRB index, a basket of 19 commodities, which has fallen below 400 points to its lowest level since early April, a drop of about 14 percent since a record peak above 473 in early July.

So is the commodity supply/demand squeeze over?

Investors have retreated from the commodity markets on fears that economic slowdown in the United States has infected growth in the rest of the world, worries that demand growth will collapse and a rising dollar.

The global economy has been showing signs of demand destruction as a direct response to high commodity prices, especially Crude Oil. If recently released statistics are to be believed, Americans are driving lesser number of miles, buying fewer cars (especially gas guzzling SUVs) and are shifting to mass transport systems like railroads and buses, away from expensive modes like airlines. Globally also, oil consumption is expected to grow slightly in 2008 year by 760,000 barrels per day to an average of 86.8 million barrels, the weakest global growth rate since 2002. Due to a cyclical slowdown in world economy, not only in North America but also in OECD Europe and Pacific, oil demand will be weak in 2008 as well as in early 2009. Japan is also showing signs of reduced pace of economic activity.

The debate over whether the “Commodity Super Cycle” is dead or alive also revolves on whether the US-dollar has hit rock bottom against the Euro and other foreign currencies. A stronger US-dollar creates a virtuous circle of knocking commodity markets lower. In August, t he dollar rose versus all of the other major currencies this on concern the economic slowdown that began in the U.S. is spreading to the rest of the world. The dollar gained 6.4 percent versus the euro, the best performance since the European currency's debut.

Commodities prices will fall, because they always do. It is a fundamental truth of commodities that they fluctuate about a mean. If demand exceeds supply, ultimately a new mine opens and supply then exceeds demand.

What is being ignored is the fact that that though Demand has slackened, supply still remains tight. When it comes to Oil, non-demand from OECD, Asia and the Middle East still remains strong. Soaring oil prices have not slowed China 's consumption of oil as statistics show that China 's apparent consumption of crude oil and refined oil products both hit record highs in the first quarter of the year. There are talks of slowdown in Chinese economy and demand for commodities post Olympics. However, we are yet to see any convincing evidence of such a halt in Chinese economic growth. Moreover, Chinese government has recently announced a fiscal stimulus which is expected to keep the Chinese economy from slipping into a post games slowdown and by extension, the global economy going.

Also, though OPEC supply has been increasing over the past few months, N on-OPEC supply remains a big problem. Production is declining quickly in Mexico and Russia as well as Britain North Sea Oilfields. Already, with each passing day, OPEC's spare capacity is moving southward. Moreover, geopolitical situation still remains volatile, threatening to send commodities prices once again over the roofs.

Same goes for Base metals complex. There seems to be no end to the China 's appetite for Copper. Precious metals are also expected to rule at comfortable level as the global economies reel under inflationary pressure. Given the strong demand supply mismatch, possibility of a crash in prices of agricultural commodities also seems far fetched. Rising global population has led to an upsurge in demand while at the same time acreage has gone down significantly. Moreover,inventories of food are touching all time low.

Mark Mobious, the renowned investment Guru says “When you have a long-term uptrend, excesses build up along the way. We are witnessing a correction”. He continues “Demand for commodities will remain at a high level in countries like China and India . If we see a serious worldwide recession, then we will see the end of the commodities boom.”

Thus, in retrospective, it seems pertinent that bull run in commodity markets remains intact. What we are witnessing is a corrective reaction to an unusual run up in prices within a framework of a long term bull market in commodities. Bull markets in commodities last as much as 15-20 years or even more. There may be periods of large correction that may witness a fall of as much as 40%. Though prices may cool in near term due to demand destruction and a stronger Dollar, in longer term, price is expected to be largely influenced by fundamentals intrinsic to commodities. Corrections are inevitable in any uptrend and the commodities market is no exception. The long-term fundamentals dictate that any major corrections remain buying opportunities for long-term investors.

By Salman Khan

Salman Khan is a Commodity Analyst working with a leading Delhi based Indian brokerage firm, Mansukh Securities and Finace Limited as Research Analyst in Commodities. He has a rich experience of tracking Energy, Precious Metals, Base Metals and Agri Complex for last 2 yeas across various International and Indian commodity bourses (NYMEX, COMEX, LME,  CBOT, SHFE, MCX and NCDEX. He is a voracious reader and a prolific writer. He is the inhouse editor of monthly journal "MAKE MORE GUIDE" published by Mansukh Securities and Finance Limited . His articles have also appeared in leadind portals like , and . He also blogs regularly at his personal blog .

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