Recent days have seen an intense debate on the hot topic of the year — commodity prices. We have seen commodities across the board tumble in the past few months. Pessimists have started writing obituaries for the commodity bull and pronounced an end to the ascent in commodity prices. The scale of the rout can be seen in the Reuters-Jefferies CRB index, a basket of 19 commodities, which has fallen below 400 points to its lowest level since early April, a drop of about 14 percent since a record peak above 473 in early July.
So is the commodity supply/demand squeeze over?
Investors have retreated from the commodity markets on fears that economic slowdown in the
The global economy has been showing signs of demand destruction as a direct response to high commodity prices, especially crude oil. If recently released statistics are to be believed, Americans are driving lesser number of miles, buying fewer cars (especially gas guzzling SUVs) and are shifting to mass transport systems like railroads and buses, away from expensive modes like airlines. Globally, oil consumption is also expected to grow slightly in 2008 year by 760,000 barrels per day to an average of 86.8 million barrels. This is the weakest global growth rate since 2002. Due to a cyclical slowdown in world economy, not only in
The debate over whether the “Commodity Super Cycle” is dead or alive also revolves on whether the U.S.-dollar has hit rock bottom against the Euro and other foreign currencies. A stronger U.S.-dollar creates a virtuous circle of knocking commodity markets lower. In August, the dollar rose versus all of the other major currencies this on concern the economic slowdown that began in the
Commodity prices will fall, because they always do. A fundamental truth of commodities is that they fluctuate about a mean. If demand exceeds supply, ultimately a new mine opens and supply then exceeds demand.
What is being ignored is the fact that, although Demand has slackened, supply remains tight. When it comes to oil, non-demand from OECD, Asia and the
In addition, though OPEC supply has been increasing over the past few months, Non-OPEC supply remains a big problem. Production is declining quickly in
The same situation applies for the base metals complex. There seems to be no end to the
Mark Mobious, the renowned investment Guru said:
When you have a long-term uptrend, excesses build up along the way. We are witnessing a correction. Demand for commodities will remain at a high level in countries like
Chinaand . If we see a serious worldwide recession, then we will see the end of the commodities boom. India
Therefore, in retrospect, it seems pertinent that a bull run in commodity markets remains intact. What we are witnessing is a corrective reaction to an unusual run up in prices within a framework of a long-term bull market in commodities. Bull markets in commodities last as much as 15-20 years or even more. There may be periods of large correction that may witness a fall of as much as 40%.
Although prices may cool in near term due to demand destruction and a stronger dollar, over the longer term, price is expected to be largely influenced by fundamentals intrinsic to commodities. Corrections are inevitable in any uptrend and the commodities market is no exception. The long-term fundamentals dictate that any major corrections remain buying opportunities for long-term investors.