Commodities: Strength in Metals and Soft Softs
The star performer in the first quarter was nickel which gained just under 35%.
Copper hit a 20-month high at the end of the quarter as continued demand in China was bolstered by a pick-up in demand expectations in Europe and America. As we mentioned in the last Investment Quarterly, copper is a bellwether for the health of the global industrial economy. Bart Melek, Global Commodity Strategist with BMO Nesbitt Burns in Toronto commented at the end of the quarter, “For copper, demand is moving higher and the global economy is recovering. Now there are increasing signals coming out of the U.S. that the recovery is a lot better than it was.” (1)
Gold traded higher at the end of the quarter, but still less than $100 from its high in early December 2009. The star performer in the first quarter was nickel which gained just under 35% outperforming its peer group. This was largely driven by expectations of stronger demand from stainless steel mills together with the prospect of strikes and production delays. Aluminium and zinc reached 2-month highs, tin was trading at levels not seen since September 2008 while lead continued to trade fairly flat.
Sugar not so sweet
Despite the continued rise in commodity prices since early 2009, sugar, an early star of the first quarter after reaching a 29-year high in February, ended up posting a 35% fall in the quarter. At the end of 2009 prices were rising based on expected production shortfalls as a result of predicted weather problems but despite this and despite production problems in Brazil and India investors began unwinding long positions as the bubble burst. Similarly, cocoa fell to a mid-March low as prices fell by as much as 20% from a 29-year high in December. Although partly the side-effect of a strong dollar, prices have weakened due to a fund sell-off which many believe was related to the fall in sugar prices. As we pointed out last quarter, cocoa fundamentals, with shrinking supply from West Africa, point to further increases rather than falls in the price. Those with a penchant for chocolate will be hoping this is not the case.
Oil and rare earth elements
Oil finally broke through the $80/barrel mark, a relief for many fund managers who had been holding out for a return on the commodity, but a bore (especially in the UK with additional tax rises on petrol and diesel) to the man in the street where it now costs more than £1.20/litre to fill up a tank of petrol in the UK (compared to 85 pence in 2000).
Given the rate of progress of technology in recent years (witness netbooks and now the iPad) an interesting commodity play might be the demand for obscure metals, better known as rare earths. These include cobalt, tungsten, titanium, lithium, neodymium, rhenium and samarium. The Financial Times ran an interesting article in its Analysis section in January (Commodities: In their element(2)) which pointed out that cars may now contain up to 39 different minerals in components but that newer “green” technologies also rely on minor metals. The prices of such commodities were rising at the start of the year (although all apart from rhenium were down from earlier highs in 2007/08). A s Japan begins to stockpile certain rare earths is this the sign of a new commodity bubble to add to the boiling prices of gold and copper?
- Source: METALS-Copper hits 20-month high, demand signals build, reuters.com, April 1st 2010
- Source: Financial Times, Janruary 28th 2010
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