Industrial commodity prices set to dip in second half

After a strong beginning in 2008, prices of industrial commodities, barring crude oil, are expected to cool down in the second half of the year.

According to data compiled by the Economist Intelligence Unit (EIU), a London-based research agency, the prices of base metals are likely to fall 1.5 per cent as against a growth of 10.5 per cent last year.

According to EIU estimates, the Industrial Raw Materials (IRM) price index will rise by an average of 1.1 per cent in 2008 despite spot prices of major raw materials, including coke, copper concentrates, alumina, iron ore, ferro allows, having nearly doubled in the last one year. 

REVERSE GEAR Price summary (% change Y-o-Y)
	2005	2006	2007	2008	2009
WCF	4.00	28.00	23.70	14.90	-8.50
IRM	10.20	49.60	11.10	1.10	-15.10
Base metals	16.50	62.40	10.50	-1.50	-18.30
Fibres	-10.00	6.40	18.10	10.70	0.60
Rubber	12.70	38.70	7.00	7.90	-15.10
Crude oil	42.50	19.30	11.30	25.60	-6.90
Note: WCF (World Commodity Forecasts) is an index of 24 hard and soft commodities. IRM (Industrial Raw Materials) is a price index of nine hard commodities. The metals sector has a weightage of 65.1% in the IRM index. IRM has a weightage of 44.4% in the WCF index

Prices of all industrial commodities hit the roof during the first quarter of the current year. Crude oil, meanwhile, is hitting new highs everyday. On Tuesday, it hit a high of $118 per barrel.

Prices rose in the first quarter despite mounting evidence of a US slowdown, weaker economic prospects for the Organisation for Economic Co-operation and Development (OECD) countries and turbulence in global financial markets.

The weak US dollar and rising inflation expectations were key factors in driving prices higher as investors increasingly viewed commodities as a safe haven.

The rise in prices also reflect concerns about supply and the relatively low level of stocks even as Chinese demand stayed strong. Technical disruptions, especially power shortages, and rising production costs have hampered supply growth across industrial raw-material markets.

However, over the course of this year, EIU expects the downturn in the US economy to have a negative impact on industrial raw material prices.

"The impact will be exacerbated by the American recession as it will be consumer driven - thereby having a disproportionately large impact on demand for base metals used in the construction and, to a lesser extent, the auto industries," the agency said.

The liquidity crunch in the global credit markets is also likely to slow growth in Europe and Japan. "Growth in the more export-dependent emerging markets could also be constrained."

Thus, average base metal prices are expected to fall 1.5 per cent. Short-term price predictions are, however, on the upside with the ever-present threat that geopolitical tensions in West Asia, Africa and Latin America will disrupt oil supply.

Pressure in bond and equity markets could make speculative investment in the oil market seem even more attractive, pushing up prices in the process. However, there is also the risk that struggling financial institutions will be forced to sell commodity investments to cover losses elsewhere, pushing prices down.

In 2009, a modest increase in supply should have a cooling effect on overheating prices. Fundamentals for commodities will, however, remain relatively strong and EIU expects only a modest fall in oil prices.