FE Editorial : Commodity cycle

Written by The Financial Express | Updated: Aug 11 2009, 03:41am hrs
After lying low for almost a year, global commodities prices may be on their way upa recent report by Goldman Sachs argues that commodity prices could see a spike similar to the one in 2008. The main culprit this time around, like last time, will be crude oil, which is tipped to cross the $100 per barrel mark. However, a lot will depend on the next Opec meeting slated for early September, where exporting nations will take a call on whether to further cut output to bring down inventories or to maintain the supplies at the current level. There is unlikely to be a rapid global economic recovery any time soon. If one goes by the common consensus on crude oil output, a status quo is the most likely scenario, but then, last minute surprises cannot be ruled out because some Opec nations are still not comfortable with the current oil price of around $70 per barrel. Market watchers, though, are of the opinion that irrespective of the Opec meeting, crude oil prices will swell by the end of 2009 as the broader global economy takes hold. In other commodities, copperthe benchmark for most base metals, surged to a 10-month high earlier this week, before retarding slightly. Prices of other base metalslike nickel, zinc, lead and tinare also at the 2009 highs, largely on the hope of an economic recovery by the year-end. In a research note, Bank of America Merrill Lynch raised its 2009 and 2010 price forecast for aluminum, copper, nickel and zinc on the back of the impending economic recovery. In short, most base metals and crude oil could see another round of spike by end of this year.

So, what happens to agriculture commodities Market players expect a strong rise, with palm oil leading the pack, largely because of low rains in the main growing regions. Deutsche Bank AG predicts palm oil to average 2,300 ringgit ($657) a metric tonne this year, 10% more than its previous forecast because of concerns that the developing El Nino weather phenomenon could curb output in Malaysia and Indonesia, which account for around 90% of the world production. Palm oil has already risen 37% this year after a drought in Argentina destroyed huge quantities of soybean crop, boosting demand for rival palm oil. The dry weather in Asia might also impact production of grains and soyabean in China, sugar in India, coconut in the Philippines, coffee in Indonesia and Vietnam, rice in Thailand and its neighbours, Deutsche Bank added. Sugar prices rose to a 28-year high in New York on Thursday over concerns that low monsoon could crimp output in India, the worlds second-largest grower. Difficult times ahead for central banks which have an eye on inflation and limping growth.