Despite a few years of rising raw-material prices, many traders remain bullish in part because of further bad news about supply. A shortage of electricity in
South Africa, which has forced several big smelters to shut down, has helped cause platinums giddy ascent. The political upheaval in Kenya has pushed tea prices higher. A leaking pipeline in Nigeria and a row between Exxon Mobil and Hugo Chvez, the president of Venezuela, have contributed to oils recent gains.
Mining and oil firms are struggling to increase output, partly because it takes years to develop new mines or oilfields, partly because shortages of equipment and labour are hampering expansion, and partly because governments in resource-rich countries are becoming ever more prone to jacking up royalties or expropriating resources. Citigroup, for example, expects global copper production to rise by just 2% this year, even though the price is now five times higher than it was five years ago and stocks amount to less than three days demand.
In theory, farmers should be quicker to respond to price signals, since they can easily substitute one crop for another. But the prices of wheat, corn and soyabean are all high, so any big shift towards one crop will come at the expense of the others. There is huge potential to bring more land under cultivation in Ukraine and Kazakhstanbut that would need improvements to infrastructure that could take years.
Meanwhile, most analysts expect demand for raw materials to remain firm despite the gloomy economic news. Although Goldman Sachs, for one, expects oil consumption to fall in America, it also predicts that continued growth in booming spots such as China and India will underpin global demand. The International Energy Agency, a watchdog group for consuming countries, still expects the worlds consumption of oil to rise 1.9% this year.
Worse, rising prices and tightening credit give the firms that process raw materials an incentive to run down their stocks, argues Jeffrey Currie of Goldman Sachs, making prices all the more vulnerable to supply shocks. Americas Department of Agriculture believes global demand for wheat will continue to exceed supply this year. That will push Americas wheat stocks to their lowest level since 1948 (see chart).
Nonetheless, the prospects for demand must have diminished at least somewhat as the world economy has slowed, and the outlook for supply has not worsened dramatically in the past few months. Hence some other factor must be at play. Many analysts blame speculation. As falling interest rates, tumbling stockmarkets and contracting house prices drive investors out of bonds, equities and property, the argument runs, there is lots of money looking for a new home. And since commodities have produced such lavish returns in recent years, and have weathered the recent turmoil relatively unscathed, they are an alluring option.
Citigroup believes that the recent rise in the oil price is driven principally by a sharp uptick in fund flows. Lombard Street Research sees an iron bubble. Others worry that Americas fiscal stimulus may cause trouble by inflating demand for commodities. In Citigroups cheery phrase, the collapse of one bubble often sows the seeds of the next.
The Economist Newspaper Limited 2008