The Hindu Business Line : Commodity boom set to continue: Barclays

Bright prospects
Resource scarcity and high carbon costs have boosted demand for bio-fuels.
Relative to inflation-adjusted benchmarks, price rises look modest.

G. Chandrashekhar

Mumbai, Nov. 17 Commodity prices have been rising for sometime now. Be they energy products, precious metals, industrial metals or agricultural commodities, the markets have been booming. Crude is threatening to breach the three-digit mark. Gold prices have spiked to a 28-year high. Base metals are strengthening selectively. Cereals and vegetable oil markets have spiked as never before; prices have doubled.

Inter-linked

Examining the commodity market dynamics in a changing macroeconomic environment, Barclays Capital asserts that commodity market trends are increasingly interlinked. Resource scarcity and high carbon costs combined with burgeoning demand resulting from rapid industrialisation (especially China) have not only created a spectre of inflation but also boosted demand for bio-fuels which has pushed food and feed prices up which, in turn, is raising labour costs.

In its latest World Energy Outlook report, the International Energy Agency (IEA) has projected necessary investment in energy infrastructure at $22 trillion by 2030, 8 per cent above last year’s projection (with the forecast covering one year less), citing higher unit costs, especially upstream oil and gas, pushing up overall capital requirement.

Suggesting that the commodity bull market is still in its early stages, Barclays points to copper as a good example. The metal’s importance in infrastructure development and the industrialisation process makes it a good indicator of broad commodity trends. Research shows that during what is often called the second industrial revolution, at the turn of the 19th century, the US industrialisation, urbanisation and electrification kept copper prices much higher than today’s levels for much longer.

Thinning shock-absorbers

The commodity market shock-absorbers are likely to stay thin. For instance, grain stocks are at their lowest for 30 years, while base metal stocks have never been lower. Oil inventory is falling fast and is expected to stay low, heightening the market’s sensitivity to geopolitics and other supply problems.

One of the interesting observations of the research is that although the prices of many commodities have set new records in nominal terms in recent months, relative to inflation-adjusted benchmarks, price rises look modest.

Many commodities are still trading a long way below their 1970-1980s’ real price highs.

A major booster for commodities is the expected shift in global growth to commodity-intensive economies. While a strong recovery in global growth is forecast for 2008, the pattern of growth is seen shifting to commodity-intensive developing countries (such as China). No wonder, China drives the metals fundamentals (copper, aluminium, lead, zinc), as the US takes a backseat.

Shifts in demand

Suggesting that commodity demand is income elastic, Barclays’ report points out that despite doubling of gasoline prices since 2001, US gasoline demand is still rising. Similarly, copper demand has been rising in Asia despite higher prices because of rising incomes.

Structural shifts in global demand for commodities have come to the fore. Global energy demand per capita has risen 10 per cent this decade, while the downtrend in metals usage relative to global growth has bottomed. On the other hand, the upward trend in global meat consumption is set to continue.

Rising production and transportation costs are also adding to commodity prices, Barclays pointed out.

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