Commodity Returns Are All Over the Board

Demand for lead has been driven partly by the economic growth in Asia and the need for raw materials to support it. However, lead prices are due for a downturn according to a recent Bloomberg article that cited UBS and JPMorgan. Production and shipments from refineries are expected to increase, while at the same time, lead recycling activity has been on the rise. According to the data, lead is expected to tumble 20% from now to the end of the year, although that isn’t enough to wipe out the gains it made already this year. The well-known S&P Goldman Sachs Commodity Index (S&P GSCI) should hardly register this change as the metal represents less than 1% of the index’s weight.

Uranium’s returns can probably be attributed to renewed interest in nuclear energy as concerns about global warming cause energy providers to look for cleaner power sources. However, according to Bespoke, it too is headed for a fall, with a 33% decline from current levels anticipated for the remainder of the year. This represents the steepest expected decline for the 20 commodities considered. Meanwhile, tin was up 45% year to date but is expected to see a 30% decline from its current level. Essentially the three biggest winners for the year-to-date period look as if they may turn out being the biggest losers for the last months of 2007. Can you say “reversion to the mean”?

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Source: Bespoke Investment Group

Natural gas and nickel were among the poorest performers for the year-to-date period, down 8% and 16%, respectively, but are expected to be the best performers for the rest of the year with returns of 17% and 28% respectively. The projection could turn into a moderate boost for the S&P GSCI, which has a current weighting in natural gas of a little more than 7% and a weighing in nickel of just about 1%. Meanwhile, zinc, which fell 19% year-to-date in the worst performance of all 20 commodities, looks as if it will continue to decline a further 4% from its current level, adding additional drag to the S&P GSCI, of which it represents a bit more than 1%.

Of the big name commodities, the future for oil looks grimmest, with a 12% fall expected by year end off of a 9% year-to-date increase. This represents a significant potential hit to the S&P GSCI, which has a weighting of more than 60% in petroleum products, with Brent and WTI crude oil representing more than 50% of the index.

Copper has seen prices rise so much recently that some property owners worry about the safety of their pipes. It is up 18% year to date but is projected to fall 13% from that level. Copper is currently at slightly less than 4% in the S&P GSCI. Gold, which was up 4% year to date, is expected to continue keep on trucking with a further 3% increase from current levels. Its weighting in the GSCI is less than 2%.

It looks as if the subprime disaster has spread to commodities, causing sell-offs in various parts of the market. How much effect it will have on the current predictions remains to be seen.

Source: Bespoke Investment Group