Commodities hint of bottom on mine closings, supplies

Corn and soybeans have rebounded as reduced crop yields push US stockpiles to near five-year lows. Oil has reversed on the US-Russian tensions. Nickel has turned after Xstrata closed a Dominican Republic plant.

The worst rout in the history of commodities may be ending, signalling a replay of the 2006 tumble that preceded a doubling of prices in the next 17 months as measured by the Standard & Poor’s GSCI index. Only this time, the driver is supply cuts rather than increasing demand.

Supply constraints are “coming more and more to the fore’’ and that “will separate the performance of individual commodities,’’ said Alan Heap, global commodity analyst at Citigroup in Sydney. “We’re still looking for higher prices next year and in some cases the year after.’’

Commodities are in their seventh year of gains, fueled by demand led by China and India and disruptions to mine and farm supplies. A rebound in raw materials from four-month lows may boost profits at BHP Billiton, raise costs at Nestle and stoke inflation, limiting the ability of central bankers Ben S Bernanke and Jean-Claude Trichet to cut interest rates and revive growth in the US and Europe.

Oil is up 3 per cent from a more-than-three month low after gaining 10 per cent on concern supply may be disrupted by tension between Russia and the US over Georgia and Poland’s missile shield. OPEC may consider output cuts at its September 9 meeting, Venezuela Energy and Oil Minister Rafael Ramirez said, and the US gasoline stockpiles are dropping. Oil ended at $114.59 a barrel on August 22, down 22 per cent from its record $147.27 on July 11, and traded up 0.5 per cent at $115.20 today.

Rogers on oil

Investor Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said on August 23 that crude oil prices will climb.

“Over the course of time, it’s a bull market,’’ Rogers, 65, chairman of Rogers Holdings, said after an investor conference in Kuala Lumpur. While oil could fall to $75 or rise to $175, prices will appreciate during the next 10 years, he said.

Copper, after plunging as much as 20 per cent from its $8,940 a tonne record on July 2, has rebounded from a six-month low as output fell at BHP Billiton, the world’s biggest mining company, and Chile’s Codelco, the largest producer. Aluminum may gain as power shortages force producers in China to curtail output, said Barclays Capital, the securities unit of London-based Barclays.

Xstrata, the fourth largest nickel refiner, said on August 19 the suspension of its Falcondo operations in the Dominican Republic may last four months. The operations produce 29,000 tonnes of nickel a year, or about 2 per cent of world primary nickel production.

‘Still Intact’

Corn and soybeans, down as much as 37 per cent from their peaks, gained the past two weeks as delayed plantings threaten to reduce US yields and on concern export tax protests may disrupt supplies from Argentina, the second-largest exporter of corn and third-largest of soybeans. That would strain world cereal stockpiles that the United Nations’ Food and Agriculture Organization says are near a 30-year low.

“I don’t think the commodity boom has ended at all,’’ Malcolm Southwood, a Melbourne-based commodities analyst with Goldman Sachs JBWere, said on August 21.

Commodities, as measured by the Standard & Poor’s GSCI index of 24 raw materials, had their fastest 30-day decline to August 15, slumping 21 per cent, after peaking on July 3.

The California Public Employees’ Retirement System, the largest US pension fund, remains committed. Calpers, which oversees $239 billion, said in February that it may raise commodity investments 16-fold to $7.2 billion through 2010. Supply constraints come at a time of sustained demand in China and India, home to a third of the world’s population.

China may spend as much as 400 billion yuan ($58 billion) to stimulate the economy and ease monetary policy, said Frank Gong, head of China research at JPMorgan Chase.

The country’s factory and property spending accelerated through July, fuelled by rebuilding after the Sichuan earthquake, the statistics bureau said on August 15. Exports surged and retail sales growth was the most since 1999. Chinese demand may also increase as factories shuttered for the Olympics reopen. The economy expanded 10.1 per cent in the three months through June.

India, which could emulate China in demand for raw materials, will grow 7.7 per cent in the year to March, a government panel said on August 13. Federal Reserve Chairman Bernanke signaled last week that the central bank expects the commodity rally to ease.

The Fed is keeping its target for interest rates “relatively low’’ because of “our expectation that the prices of oil and other commodities would ultimately stabilise, in part as a result of slowing global growth,’’ Bernanke said on August 22 at the Kansas City Fed annual conference in Jackson Hole, Wyoming.