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| Commodities rise most in 24 yrs |
| Bloomberg / Jun 02, 2009, 00:59 IST |
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Manufacturers preparing for an economic rebound are rebuilding inventories of everything from benzene to plywood, sparking a commodities rally that Goldman Sachs Group Inc. says will produce 19 per cent returns during a year.
The Journal of Commerce index that tracks prices of 18 industrial materials gained 9.5 per cent in May, the most in a month since the measure began in 1985. Goldman’s forecast on May 8 would beat the firm’s estimate for a 4 per cent rise in the Standard & Poor’s 500 Index this year.
Aurubis AG, the top manufacturer of copper-wire rods for cars, said last week that demand had improved since April. Huntsman Corp., the biggest maker of epoxy adhesives, said May 8 that the second-quarter results will benefit from improved sales to customers who have depleted their stocks. Dow Chemical Co, the largest US chemical maker, said its plants operated at 70 per cent of capacity in April, up from 45 per cent in December.
“The distribution chain will generate this giant sucking sound of demand,” Alcoa Inc. CEO Klaus Kleinfeld said at an investor conference May 29 in New York. The largest US aluminum producer said metal distributors have “seen some green shoots” in orders and are concerned they won’t be able to satisfy clients as the economy recovers because inventories are near zero.
While the US contracted 6.3 per cent in the fourth quarter and probably will shrink 2.8 per cent this year, according to the median in a Bloomberg survey of 61 economists, commodity prices show that investors and corporate purchasing agents anticipate a rebound will begin later this year.
The Journal of Commerce Industrial Price Commodity Smoothed Price index improved to an annual rate of minus 26.82 last week, compared with a record of minus 69.9 in December. While the gauge of materials from tallow to steel indicates demand is contracting, the narrowing gap suggests manufacturing is bottoming.
Among exchange-traded commodities, copper rallied 63 per cent this year to $5,014.75 a tonne as London Metal Exchange stockpiles dropped 43 per cent since February to a five-month low of 311,975 tonnes. Crude oil surged 53 per cent this year to $68.14 a barrel. Cotton is up 18 per cent. “When you see copper and commodities doing well, then it’s a sign that there are meaningful parts of the global economy that are stronger,” said Evan Smith, co-manager of the U.S. Global Investors Global Resources Fund in San Antonio that’s up 37 per cent this year. “We like the outlook for commodities right now.”
Prices are showing signs of a rebound less than a year after the Reuters/Jefferies CRB Index of 19 commodities began its plunge from a July 3 record, dropping as much as 58 percent by February 24 as the global economy entered its first recession since the Great Depression.
A freeze in credit markets that started with the collapse of the U.S. property market in 2007 halted world growth and the world’s biggest financial institutions reported more than $1.48 trillion of writedowns and credit losses. The contraction prompted central banks and governments to cut interest rates close to zero and pledge more than $13 trillion for stimulus programs and rescue measures.
Signs of recovery are appearing. The CRB index, after dropping on Feb. 24 to the lowest level since June 2002, reached 253.05 at 4 p.m. on May 29, marking a 14 percent gain for the month, the biggest rally in 34 years. The dollar slumped last week to a five-month low against a basket of six major currencies, bolstering demand for energy, metals and crops as a hedge against inflation.
“The global industrial engine is restarting and that will mean these industrial commodity prices will continue to rise,” said Lakshman Achuthan, the New York economist who predicted in November that the world was headed for its worst recession since at least 1981. “There are very clear signs that demand for commodities is improving.”
The rally boosted mining and metals companies. Phoenix- based Freeport-McMoRan Copper & Gold Inc. rose 28 percent in New York trading in May, the sixth straight monthly gain and the most in more than eight years. Pittsburgh-based U.S. Steel Corp. also gained 28 percent and reached a three-month high.
A sustainable recovery would be a surprise to analysts at Charlotte-based Bank of America Corp. In a May 15 report, the bank dismissed proponents of an economic rebound as “overly optimistic” and said the “protracted credit cycle” may last through 2016.
The US economy has lost 5.7 million jobs since the recession began in December 2007, and the jobless rate rose to 8.9 per cent in April, the highest since September 1983. Unemployment probably rose to 9.1 per cent in May, according to the median estimate of 60 economists in a Bloomberg News survey ahead of the Labor Department’s June 5 report.
Mortgage delinquencies and foreclosures climbed to records in the first quarter, and U.S. builders broke ground on the fewest homes on record in April.
The slumping auto and housing industries will weigh on U.S. growth and limit consumption of raw materials, said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York. A typical home uses about 439 pounds (199 kg) of copper and a car uses about 50 pounds.
“We don’t really buy into the theory that the recovery is coming, because a lot of parts of the economy are still weak,” Flerlage said.
Even a sluggish recovery may help commodities because manufacturers have drawn down inventories.
US inventories of durable goods, from plastics and fuel to airplanes and tractors, dropped for four straight months through April, the Commerce Department said May 28. Stockpiles of iron, aluminum and steel slid for seven straight months and are down 14.2 per cent from April 2008, the department said. Supplies of fabricated products such as kitchen utensils, cans and plumbing fixtures fell 5.9 per cent.
Stores of gasoline have fallen for five straight weeks to 203.4 million barrels, according to the Energy Department, a sign that consumers are using more fuel. The Organization of Petroleum Exporting Countries decided last week to keep production quotas unchanged, “seeing a light at the end of the tunnel” for demand, Secretary General Abdalla El-Badri said on May 28.
Ali al-Naimi, the oil minister for Saudi Arabia, the world’s largest producer, said last week energy demand is improving and predicted crude will reach $75 this year.
Jeffrey Currie, Goldman’s London-based head of commodities research, said in the May 8 report that a jump in agriculture and energy prices will help the Standard & Poor’s GSCI Enhanced Commodity Index return 19.1 per cent over the next year. The measure jumped 16.8 per cent last month.
Equities won’t do as well, according to David Kostin, Goldman’s chief US stock strategist. In a February 26 report, he predicted the S&P 500 will advance to 940 this year, down from his earlier forecast of 1,100. The index closed at 903.25 on December 31 and 919.14 on May 29. A Goldman spokeswoman said May 29 that Kostin hasn’t updated his forecast since February.
Currie said copper, zinc and soybeans will have the biggest gains in coming months because they’re tied to rising demand in China. Energy prices, hurt by slowing economies in Europe and the US, will get a boost once growth resumes, he said.
Chinese Demand
Commodity shipping rates are rallying, suggesting world trade is starting to pick up. The Baltic Dry Index, the measure of costs to move bulk goods, jumped to an eight-month high on May 29 after falling 94 percent in the second half of 2008, as China increased purchases of iron ore. Imports of the steelmaking ingredient surged 33 percent in April, setting a record for a third month. China is the world’s biggest steelmaker.
Demand is also poised to gain in India as the government increases investments in ports, roads and bridges, Steel Secretary Pramod Rastogi said May 18. Steel Authority of India Ltd., the nation’s biggest state-run maker, said sales would increase 5 percent in May as demand rose.
“What is unshakeable is our belief that China and India and other emerging economies will be the key engines of any return to world growth and commodity demand growth,” said Sam Walsh, an executive at London-based Rio Tinto Group, the world’s third-largest mining company.
Stimulus Spending
China is spending 4 trillion yuan ($586 billion) to revive what has been the world’s fastest-growing major economy. The expansion will accelerate to 8.3 in the third quarter and 8.9 percent in the fourth, according to the median estimates of eight economists surveyed by Bloomberg.
The nation is also buying commodities in part to shift its sovereign wealth amid concern that the value of dollar assets may decline, the Royal Bank of Canada has said. Oil imports and stockpiling may be the reason oil rose above $60, according to Sanford C. Bernstein & Co. Imports may have peaked in March and April, while tanker arrivals into Strategic Petroleum Reserve ports have increased by about 400,000 barrels a day, Bernstein said in a research note May 22.
China’s State Reserve Bureau contracted to take 300,000 tons to 400,000 tons of refined copper into its stockpiles from overseas this year, according to Macquarie Group Ltd.
“The whole industry rebounded in the first half of this year because demand for automobiles in China remained strong despite the economic slowdown elsewhere,” said Zhu Yijun, an auto industry researcher at the state-backed Shanghai Information Center. “Many consumers in China are only starting to buy vehicles for the first time. So the outlook remains more bullish for the Chinese market than in other countries.”
Tractor Sales
Moline, Illinois-based Deere & Co., the world’s largest maker of farm equipment, reported second-quarter profit that topped analysts’ estimates as sales of machines remained “strong.” Caterpillar Inc. Chief Executive Officer Jim Owens said in May the residential real estate market is “finding a bottom” and the “recovery potential in this sector is very significant.” Caterpillar is based in Peoria, Illinois.
Investors have begun putting money back into raw materials. Hedge funds are making the biggest bet in 10 months that prices of U.S. commodity futures will rise.
Commodity mutual funds received $303 million in new money the week ended May 27, according to EPFR Global. Raw-materials funds have attracted $5.2 billion this year, lifting total assets under management to $34.3 billion, the group said. Energy funds have lured $1.4 billion, increasing total assets to $20.3 billion.
U.S. Global’s Smith said the fund has expanded its holdings of mining and energy stocks during the past few months on expectations rising demand may push oil to $75 by October. Copper in New York may jump 12 percent in the next 90 days to $2.40 a pound, said Michael K. Smith, the president of T&K Futures & Options President in Port St. Lucie, Florida.
“A lot of money is coming back into the commodity markets now on the view that things are going to turn around economically and on the idea that inflation will become a threat again,” he said.
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