Commodity prices set to recover
Published in the Courier Mail September 2008
by Erica Thompson
COMMODITIES have not run their final race but are unlikely to keep smashing price records in the near term, analysts say.
Prices for underlying global commodities plunged 10 per cent in July, their worst monthly performance since 1970.
While they have since recovered some ground, there are fears the resources sector will struggle to rally as strongly as it has in the past.
"There are signs the global economy is slowing, which is bad news for commodity demand for the short to medium term," wise.owl.com senior equities analyst Simon Guzowski says.
"It is also looking increasingly likely that China could slow from double digit growth towards the high single-digit growth.
"This suggests that prices in most commodities have peaked for now."
While he believes the industralisation of China and India will help underpin demand for years to come, there could be a few bumps in the road with the global credit crisis and rising mining costs causing delays in the development of new projects worldwide.
BHP Billiton boss Marius Kloppers, while confident nothing has changed the long-term growth outlook, also recently indicated investors might have to lower their expectations in the short term.
"People are way too optimistic and have been way too optimistic for years on the speed at which new projects can really deliver new volumes," he said.
Fat Prophets resources analyst Gavin Wendt says the mining boom is far from over.
The recent commodity sell off coincided with a seasonal drop in commodity demand and prices, he says.
"Exacerbating the situation this year is the Beijing Olympics, with China in self imposed industrial slumber," he says.
"Right now, precious metals, energy and commodities are experiencing a sharp and nasty correction.
"While this could continue for a few more months, as happened during the second half of 2006, we maintain that were in a correction, not a long-term bear market."
However, Wealth Within investment analyst Dale Gillham says speculators will continue to rock the boat as they try "to second guess the market".
"The declines have not just been about the financial numbers, trading activity is being exaggerated by the speculators closely following this news," he says.
"We expect commodities to experience a recovery over the next six months to challenge recent highs.
"However, during this period we do not expect the current all-time highs to be broken."
He says BHP and Rio Tinto are best placed to ride out the volatility because of their diverse portfolios.
Another reason is also because "the demand for iron ore is unlikely to fall swiftly and forward contracts are already locked in at very high prices".
"The concern at the moment is the takeover of Rio by BHP and the hurdles yet to be met, so there are still questions hanging over the future of these companies."
