The year 2008 could well go down in history as among the most volatile for global commodities markets in terms of prices. From contract highs in the February-March period, prices of most commodities in both the agriculture and non-agriculture sectors were staring at multi-year lows by December. All these in such a short span of time have raised questions on whether the surge in commodity prices that was seen at the start of the year was just a bubble which burst prematurely or driven by fundamentals.
As experts and market players ponder over the reasons for such massive swing in global commodities, one thing is increasingly becoming clear that going forward in 2009, the scenario cannot be expected to be very rosy. If the gloom surrounding global economies doe not lift in the next six to eight months and the sharp fall in prices does not lead to new demand, then more pain should be expected for all stakeholders in commodities market.
Picture this: in 2008, crude oil prices fell from around $147 per barrel in July to below-$40 levels with some brokerages predicting a below-$30 fall in the next few weeks. Meaning that in a span of less than six months, crude oil prices have dropped by more than $100 per barrel. If one considers the world?s daily expenditure on crude, then according to an estimate, an additional $8.2 billion has come into the hands of the consumers in just less than six months because of the more-than $100 per barrel fall in the price of crude oil.
But, whether this additional money translated into any additional demand or not, it can be clearly established that new demand creation is virtually non-existent, howsoever cheap commodities might have become. ?The thing that needs to be watched out in 2009 is where the bottom is exactly. Because by common economic logic, low prices should translate into some higher demand, which till now we have not seen,? said Rajini Panicker, head, research, MF Global (India).
Experts believe that crude oil will continue to be the main driver of prices in other commodity markets in 2009 and its rise or fall will have a direct bearing on others. ?This will be more pronounced in non-food commodities like base metals and also to some extent in gold, because of its correlation with the dollar,? another analyst said.
The other commodity to watch out for in 2009 is gold. The precious metal shed more than 30% between January and September, before recovering slightly because of its appeal as a safe-haven investment. The trend should continue in the next year as well, because going by the prices, it seems the precious yellow metal is losing its direct correlation with crude. ?If we take the current crude prices, which is well below $40 a barrel, then actual gold prices should be somewhere around $250-$300 per troy ounce. But trading at around $870 per ounce, this clearly signals that the metal is attracting buyers because of its appeal as a safe-haven investment,? Panicker added. Experts believe that with geo-political tensions escalating in the Middle East and South Asia, the metal should continue to find support from investors. ?Moreover, low inflation and a fall in dollar is always supportive for the metal,? another expert said. In the base metal space, copper is the commodity to watch out for as the global slump and declining demand from major consumers like China and India could further pull down prices of this vital industrial commodity. In 2008, copper prices dropped by around 57% as economies across the globe showed signs of slowing down. Friday copper futures for March delivery rose 2.95 cents, or 2.3%, to $1.3035 a pound on the Comex division of the New York Mercantile Exchange. Earlier, the price touched $1.255, the lowest for a most-active contract since October 29, 2004. The metal dropped 1.7% this week. The same should hold true for all other base metals like aluminium, lead, zinc and tin.
Among foodgrains, wheat should be the commodity to watch out for in 2009 as bulging closing stocks and increased planting could pull prices further down. ?Usually, food prices are less elastic than non-food prices and are also not much impacted by global recession. But that should not prevent prices from falling as stocks are rising,? Panicker said.
According to the Food and Agricultural Organisation (FAO), global stocks of wheat in 2008-09 should touch 187 million tonne, almost 21% more than last year. Analysts said that even though demand for food and demand for agricultural commodities not directly linked with crude are not expected to move in tandem with oil prices, but fundamental factors like huge inventories could keep foodgrain prices down in 2009. Though 2008 was not exactly good for most market participants, the big question still remains as to how 2009 will pan out. What everyone needs to watch out for is that although prices are coming down and fast, it is not translating into more demand which simply goes against basic economics.
