By Sreekumar Raghavan, Commodity Online
The first two months of the New Year may not have been eventful for commodities with gold prices still hovering around 1100 levels after rising to a high of 1227 in December. Emerging market demand is still supportive of base metals and energy but there were short-term factors that brought about corrections in the market—the Euro Zone sovereign debt crisis, US Fed Reserve increasing bank rates and China’s monetary policy tightening.

Far in the horizon, however, analysts still find hope. Rubber prices are at an all time high thanks to steady crude oil prices and rising automobile demand. Some indicators suggesting economic recovery to take off by end of 2010 augur well for commodities sector as a whole.

The supply side constraints for some agri-commodities, rising demand for construction materials on economic recovery, increase in dollar value and prospect of US interest rates by year-end—perhaps these deadly combination is what analysts are looking at when they forecast a bright year ahead for commodities.

Last year, commodities witnessed a record inflow of $70 bn and a survey of 250 investors who attend a recent Barclays Capital Annual Conference in Barcelona revealed that most investors are optimistic inflows would equal or exceed this year, a Reuters report said.

Among other positive endorsements include that from Rio Tinto’s Chief Executive Tom Albanese. In its annual report released this week, he said that China’s demand for iron ore, copper, coal and aluminium will increase dramatically during the next 15 years before India takes the lead in this direction.

Rio Tinto report said the short-term outlook for mining and metals is also improving but will likely remain volatile.

Majority of those who attended the Barclays Conference quoted above said they planned to increase their commodity exposure in the next three years with bright prospects for platinum group metals, copper and freight. The biggest worry for investors is deterioration in fundamentals rather than regulatory issues.



The Food and Agricultural Policy Research Institute (FAPRI), an economic research group with centres at Iowa State University and the University of Missouri-Columbia, expects economic turnaround and bioenergy mandates to push demand for food, feed and fuel, stimulating trade and price recovery over the rest of the decade.

According to a FAPRI outlook submitted to US Congress, slowdown in the world economy in 2009 proved to be deeper and more widespread than originally anticipated, with a negative annual rate of real GDP growth of -1.9 percent. However, significant recovery is projected for 2010, with long-term real GDP growth of 3.3 percent reached by 2011. The Asian economies withstood the economic crisis, posting positive growth in 2009 (for example, China at 8.5 percent and India at 6.4 percent), and thus lead the world economic recovery

The U.S. dollar made significant gains in 2009 but it resumes its real depreciation over the rest of the decade against the currencies of Australia, the European Union, New Zealand, Argentina, and China.

The economic recovery is accompanied by projected stronger energy prices. FAPRI expects that continuing recovery of crude oil prices and bioenergy mandates will grow demand and strengthen the world price of ethanol through 2019. Global net trade in ethanol is projected to increase by 3.12 billion gallons and reach 4.15 billion gallons by 2019. Biodiesel mandates in the Americas and Europe sustain the high price of biodiesel and vegetable oil, with growth in consumption mostly met by domestic production, as the traditional South American exporters also face domestic mandates.

Meanwhile, a depressing report has come from Tokyo with the face value of funds sold by commodity brokerages in Japan falling to a new record low in February, hit by growing competition from other financial firms selling similar products, Reuters report said.

The value of funds shrank 1.3 percent to 15.1 billion yen ($166.7 million) last month from 15.3 billion yen in January, according to data compiled by the Japan Commodities Fund Association.In December, the value of funds showed the first month-on-month increase since August 2007, but it slipped back in January, the report added.

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