The Hindu Business Line : Crude, metals to remain firm in Q4

THE world may be amidst an unusual commodity boom. The broad-based strength in the commodity markets with crude, natural gas and copper hitting all-time highs in the past few months, as also energy and farm commodity prices surging to fresh multi-year highs, is an unprecedented phenomenon.

Both demand and supply side factors are at work, in tandem. Commodity market investments too have soared with major indices generating annualised returns in excess of 50 per cent in the third quarter of the current year, points out an expert.

"The basis of this spectacular performance is the supply constraints that have roots in the long period of under-investment," according to Ms Ingrid Sternby, base metals analyst with Barclays Capital, who believes it will take many years to set things right as attempts to bring demand and supply into a state of balance are hampered.

A combination of resource depletion, ageing infrastructure and increasingly severe shortages of labour and materials has contributed to supply underperformance so far this year throughout the natural resources sector.

On the other hand, commodity consumption is reaching newer heights across the world, spurred by robust global economic growth. Asia has become an important growth engine. China, in particular, continues to display a voracious appetite for commodities.

Struggling to feed the growing demand for a wide range of commodities, the world market has so far coped with supply constraints by drawing down on inventories or utilising spare capacity.

As a result, commodity markets are now extremely vulnerable to shock. While there is expectation of continuing global economic growth, given the nature of constraints faced currently, these constraints are likely to remain even if growth were to slow.

"For these reasons, we continue to see upside potential in many commodity sectors. In energy, we favour exposure to refined petroleum products, rather than crude oil in Q4, and in metals we continue to recommend that consumers and investors buy into price dips," the analyst pointed out.

Among precious metals, gold is seen vulnerable to a sharp move lower by year-end due to current speculative excess. In agricultural commodities, sugar seems to have a further upside potential.

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