Commodity prices have started to pick up again as rationality has returned to the markets at the end of 2009. The outlook for the coming months seems promising especially for hedge fund investors.
After prices fell sharply and some commodities even traded below cost of production at some instances, the market has recovered throughout the second half of 2009. As of October 31, the Reuters/Jefferies CRB Index had risen by 15 per cent since July. Even though the recovery of the global economy has yet to reaffirm and follow up on the first positive signs, commodities offer a promising outlook for the coming three to four months. Energy and grains specifically drove up market indices while crude oil has again reached a level at $80. Due to the weakening US dollar other commodities were able to soar as well. However, uncertainty continues to be a big factor in the markets, thus investing in commodities through hedge funds offers investors considerable benefits as they can profit from rising as well as falling prices.
Strong Asian market
The solid growth environment in the emerging markets, especially in Asia, has had very positive effects on commodities. Particularly in China, economic growth is back as strong as ever. Investments into infrastructure have picked up throughout 2008 and 2009 and projects for the next couple of years promise a continued demand for base metals. Currently, there are more than 15 cities alone in China that have plans to build a subway system; this would mean multibillion dollar investments in the Asian region alone. As soon as the US economy starts to pick up, demand for metals such as copper, nickel, zinc and platinum will further increase as no excessive stock building took place, especially in copper. Platinum and palladium are used in catalytic converters in the car industry and with recovering car sales, prices for these metals will rise accordingly.
Soft commodities and grains have driven the overall price recovery in agriculture. In China we see a disturbing development with more and more people moving to the cities. This growth of the certain cities leads to a desertification of what once used to be agricultural land. Once these regions are abandoned and a desert has started to emerge, the land is generally lost for good. This fact combined with the growing world population will drive up prices also in the feeding commodities sector.
Prices in the energy sector are generally at a high level despite high inventory levels. Crude oil prices have finally recovered and are in a very strong contango curve at the moment trading at around $80.
Driving season in the US (this starts on Memorial Day, May 31, start of the main holiday season where most Americans drive into the country or to the coasts) drove up demand for gasoline during that period of time.
With an uptick in industrial activity we should soon see stabilisation in the market though. Nonetheless, spare capacity is falling constantly, thus rendering the possibility of crude oil prices rising above $90 a barrel this year real, although Opec has still ample spare capacity.
It remains to be seen whether increased demand in 2010 will push crude oil even over the $100 level once again. With big projects in China and India, it ultimately depends on Opec stepping up on the supply side. After setting a 20-year record in February, crude oil inventories are now below 2006 and 2005 levels in the three major OECD markets of Europe, Japan, and the US.
- The author is CEO of Man Investments Middle East. The views expressed are his own
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