Commodities trounce stocks, bonds

Commodities are beating stocks and bonds for the first time in nine months, and the quarterly rebound is likely to continue on China's increasing imports of raw materials.

Oil, gold, soybeans and sugar for delivery at the end of the year on the New York Mercantile Exchange and the Boards of Trade in Chicago and New York show at least a 3.7 per cent appreciation, beyond the 5.7 per cent gain in the UBS Bloomberg CMCI index of 28 commodities through March.

"When we look at the supply and demand'' of most commodities, there's a lot "to be very bullish about,'' said Larry Kantor, co-head of research in New York at Barclays Capital Inc, which told customers last week to buy tin, gold and corn. China has "a voracious demand for raw materials.''

Imports of copper jumped 12 per cent in February from a month earlier and were almost triple the level of a year ago, according to the Customs General Administration in Beijing. Crude oil purchases rose by 8 per cent in the month and palm oil by 20 per cent, the administration reported.

Copper rallied 8.4 per cent in the quarter to $6,860 a metric ton on the London Metal Exchange, crude oil advanced 7.9 per cent to $65.87 a barrel in New York and palm oil gained 3.5 percent to 2,064 ringgit ($597) a ton on the Malaysia Derivatives Exchange.

"We do see, across all commodities, phenomenal growth,'' Charlie Sartain, chief executive officer for copper at Xstrata Plc, the world's fourth-biggest producer of copper and nickel, said today in an interview in Manila. Demand for copper in China, the biggest buyer of the metal, may increase 8 per cent to 10 per cent this year, he said.

Quarterly Returns
First-quarter returns from commodities were more than triple the 1.6 per cent gain in the US Treasuries and the 0.2 per cent increase in the Standard & Poor's 500 Index. The Dow Jones Stoxx index in Europe added 2.5 per cent, and German government bonds returned about 0.3 per cent in the quarter.

Commodities benefited from China's increasing imports of copper, oil and construction materials.

Stocks will suffer from a slowing US economy, while European shares will be hurt by reduced profit growth, said Jane Drake, who helps oversee $10.4 billion as investment director at Tilney Investment Management in Liverpool, England.

The Treasury benchmark 10-year note fell 7 cents per $100 face value last week, continuing a monthlong slump as Federal Reserve Chairman Ben S Bernanke described inflation as his primary challenge.

"Over the next three months, commodities could outdo shares,'' said Shane Oliver, who helps manage $83 billion at AMP Capital Investors Ltd. in Sydney. "China is importing heavily again'' to feed the world's fourth-largest economy.

Inflation concern
Rising prices for food, metals and fuel may accelerate inflation, driving up manufacturers' costs and dashing speculation that central bankers from Washington to Tokyo will lower interest rates.

Inflation as measured by the US Consumer Price Index rose at an annual rate of 2.4 percent in February, greater than economists forecast. The annual rate was 3.1 percent in 2006. Consumer prices rose 1.8 percent in the year through February in the 13 nations that share the euro, compared with a 2.4 per cent increase a year earlier.

Fund managers say inflation and a weakening real-estate market are the biggest risks to stocks during the next year, according to a quarterly survey released last week by the Russell Investment Group in Tacoma, Washington.

Bernanke's View
Bernanke last week said central bank policy ``is still oriented towards control of inflation, which we consider at this time to be the greater risk'' than a slowing economy.

A 10.7 per cent expansion in China's economy in 2006, the fastest pace in 11 years, is spurring demand for materials to build skyscrapers, bridges, roads, cities and cars. The Chinese government forecasts 8 per cent growth for 2007.

Morgan Stanley the bear
Commodities investors so far this year are the biggest winners. As recently as January, after commodities lost money for the first time in five years, Goldman Sachs Group Inc said the outlook for higher prices was ``very much intact.'' Deutsche Bank AG told clients the drop was little more than a "correction in a continuing bull run.''

A $10 million investment in the UBS Bloomberg index earned $570,000 in the quarter, compared with a $20,000 profit from the S&P 500. U.S. Treasuries returned about $160,000.

The bears, led by Morgan Stanley, aren't impressed. The firm's chief global economist, Stephen Roach in New York, and ABN metals analyst Nick Moore in London anticipate slowdowns in the US economy later this year will damage demand and indicate their forecasts. Moore in January said falling prices then marked the ``definitive end'' of the commodity price boom.

Copper Demand
Copper use may grow 12 per cent this year in China, exceeding an 8 per cent earlier estimate, Goldman Sachs, the world's biggest securities firm by market value, said March 27, raising price forecasts for iron ore and copper. Deutsche Bank, Europe's biggest investment bank by revenue, increased its projections for nickel, copper and iron ore a day earlier.

Oil demand in China and India will continue to grow, said Jim Rogers, the author of "Hot Commodities'' who predicted the start of the rally in 1999.

"The world is doing better than we thought, and the slowdown in the U.S. is being offset by growth both in Europe and Asia,'' said Jan Loeys, London-based global head of market strategy at JPMorgan Chase & Co. "As a result commodities and equities are likely to perform better than bonds or cash.''