Key commodities cross 2008 peaks on demand, liquidity

Prices of major commodities, including gold, iron ore, silver and farm goods like cotton recently crossed their peaks of 2008 ahead of the Lehman Brothers bankruptcy, thanks to a surge in demand and excess liquidity maintained by the Fed Reserve. Not only gold, copper and silver, but maize, sugar, cotton and palm oil too have turned substantially dearer in the last few months.

Though much of the price spiral has been attributed to improving demand and supply shortages, as in the case of agricultural commodities, the role of excess liquidity cannot be ruled out either. This is especially true in the case of gold and silver and to a lesser extent, rubber.

Some analysts perceive in the situation a throwback to the pre-Lehman days when soaring commodities pushed up inflation across the globe and forced countries to resort to protectionist measures like tariff hikes and export controls. However, the price surge seen in almost all commodities ahead of the Lehman collapse is restricted to a few items now. The reasons for the spike are various and multifarious ? ranging from low supplies and rising demand to hedge against inflation and riskier competitive asset classes.

While prices of some commodities have either surpassed their peaks ? seen months ahead of the Lehman bust ? or are steadily inching towards them, the prices of others are still ruling way below their historic levels.

Take for example, the case of iron ore, a key industrial metal, in the January-September 2010 period. Quarterly average iron ore prices, as per World Bank data, almost doubled from 101 cents per dry metric tonne unit to 205 cents per dry metric tonne unit. Just months before the Lehman crash, iron ore prices had averaged 140 cents per dry metric tonne unit.

While the quarterly average price of cotton is almost 22% higher than what it was in the months leading to the crisis, the price of rubber (RSS 3, Singapore base) is almost 10-15 cents per kilogram higher than pre-crisis days.

The prices of gold and silver stand at almost $700 to $800 per troy ounce higher in 2010 than in the months preceding the Lehman crisis, when excess liquidity and fund buying were blamed for the surge in prices.

The quarterly average prices of coffee, maize, cocoa and tea have all surpassed their pre-Lehman highs. In the case of plantation commodities, supply shortages and rising demand are being primarily held responsible for the rise.

That the rise this time is not as widespread as in 2008 can be simply judged from the fact there are still plenty of commodities like crude oil, copper, aluminium, lead and zinc that haven?t yet reached those levels.

Between January and September 2010, the quarterly average price of Brent crude oil remained steady between $76.75 and $76.41 per barrel. Brent crude ranged between $96.67 in January 2008 and $115.60 in September, rising up to $122.39 per barrel in the April-June 2008 quarter.

This is also true in the case of copper, whose average prices ranged between $7,232 per tonne and $7,243 per tonne in the Jan-Mar, Apr-June and Jul-Sep quarters of 2010 while the prices in the quarters preceding the Lehman crises were $7796 per tonne, $8,443 per tonne and $7,680 per tonne.

That wheat and rice prices are nowhere near their pre-Lehman highs yet ? despite firming up ? comes a sign of relief. Experts believe that with the global food stock in a better position in 2010 than in 2008, the chances of the past repeating itself are not big.

As per World Bank data, the quarterly average price of Thailand rice, with 5% brokerage from Jan 2010 to September 2010, has dropped from $535.3 per metric tonne to $457.2 per tonne while in the quarters preceding the Lehman collapse they had risen from $478.1 per tonne to almost $855 per tonne.

Similarly, in the case of wheat, even though the recent surge in global prices ? on account of the drought in Russia and the subsequent export ban ? was threatening a 2008-like situation, good stocks in other exporting nations quelled the surge in prices. The United Nations Food and Agricultural Organisation (FAO) too had assured that though wheat prices are flaring, a food crisis is not in the offing.

The situation is same with palm oil, soybean oil and coconut oil, whose prices are improving but are not near their pre-Lehman days. The 2010 rise is largely due to low stocks and the declining production of edible oil in major producing nations.

Naveen Mathur, associate director, commodities and currencies, Angel broking sums it up: ?In the pre-Lehman days, funds were flush with money and were investing in commodities, but now they have become more selective and are selectively looking at commodities to maximise returns. It is not as widespread as in 2008.?