The Hindu Business Line : Pause likely in commodity prices uptrend: Report

Mumbai, Sept. 14 Painting a gloomy economic outlook for 2009, New York-based CPM Group in its latest report has said the recent long-term upward move in commodities prices is not over.

“The recent long-term upward move in commodities prices is not over, but should be expected to continue. It may pause, however, over the course of 2009 and even into 2010. Such a pause could last for a couple of years, reflecting lower industrial and fabrication demand for a range of commodities,” the CPM Research report said.

The pause should be viewed as nothing more than a temporary respite. Most of the trends pushing demand and prices higher remain in place and will continue to push prices higher even after a cyclical slowdown in world economic conditions has passed.

Many commodity prices have fallen sharply in the recent past due to waning demand on the back of economic slowdown globally.

Wealth factor

Drawing the basis for its predictions, the report said while economic conditions were hostile to traditional investment assets at present, and may remain so for several quarters to come, a second major trend in financial markets must be kept in mind.

“There has been a tremendous expansion of wealth worldwide, and not merely due to largesse on the part of monetary authorities. Much of the increased wealth is in cash and cash equivalents, sitting on the sidelines of financial markets waiting for attractive investments, credible management, and more stable financial market trends before re-investing,” it said.

Even as economic conditions weaken in 2008, the amount of money in the world seeking attractive investments continues to expand at a rapid pace on a daily basis. This enormous pool of investable funds suggests that when economic trends become more positive and financial market conditions stabilise, a wave of investment money may enter the world economy, leading to a rapid recovery in real economic activity.

This could have inflationary consequences, as well as likely leading to a faster-than-usual rebound from the current economic malaise.

Demand outlook

For commodities markets, these trends suggest that there could be a slowing down of demand for many commodities in 2009, as real growth weakens further. It seems unlikely that expansion will halt completely and turn into an actual contraction of real economic activity, but the slowing may reduce marginal demand for many commodities in the near term sufficiently to restrain prices from further increases.

Longer term, demand is likely to remain robust, helping to keep prices high and moving them higher. The continued economic concerns, meanwhile, should be expected to keep investors focused on gold, benefiting the price of this metal.

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