The Hindu Business Line : Further upside seen in commodity markets

COMMODITIES continue to draw attention of businesses and investors even as few financial markets are now perceived to be immune from the upward surge in prices.

Commodity indices continue to be among the best performing in any asset class.

With unabated bullish fervour gripping the commodity markets - record high energy prices, rising metals costs squeezing manufacturing margins - concerns about economic growth are, no wonder, emerging.

What is the outlook for the global commodity complex?

A well-researched report from Barclays Capital has argued that the commodity story has further to run.

Within the commodity markets themselves, consumers are still under-hedged, producers have been slow to lock in favourable margins by selling forward and investment demand for commodities is far from sated.

Experts have argued that there are long-term structural, rather than merely cyclical, factors that support higher commodities prices over the next few years.

Above-trend growth in raw material demand, under-investment in supply, low inventory levels, weaker dollar, and asset allocation in commodities are seen as factors contributing to the inference.

No doubt, the broad upward trend that has swept all commodity markets higher over the past two years is waning; but, there is still considerable upside rice risk in a number of sectors this year, the report has suggested.

Oil prices are likely to fall in the second quarter, with the threat of US gasoline shortages keeping crude prices significantly above those justified by its own market dynamics.

Any pull back below $ 50 a barrel would provide buying opportunity.

In base metals, the demand supply position is seen getting increasingly tight.

Demand for metals reaches its seasonal peak in the second quarter with consumers generally under-hedged and with markets in deficit and inventory already approaching critical lows, fresh price peaks driven by physical shortages look very likely.

As far as precious metals are concerned, the report sees few opportunities in the gold and silver markets as prices are expected to trend sideways to slightly lower during the second quarter; while being long in platinum/palladium spread on the former's positive fundamental outlook is recommended.

Agricultural commodities are struggling from oversupply and last year's record production levels, although their relatively low price levels may attract some long-term investors looking for a `cheaper' entry level.

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