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Moolah
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Posting #1: Thu Mar 27th, 2008 05:23 |
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Monday March 24, 2008
Softening demand for commodities
By Hanim Adnan
The recent tumble in global commodities prices has sparked renewed talk of a commodity “bubble burst.” Sentiment has been dampened by concerns over a possible US recession and slower global economic growth for 2008 and 2009.
After sustaining increases for at least five years, major commodities spiralled downwards with crude oil falling below its US$100 mark per barrel and gold dropping about 10% from its record price of above US$1,000 per ounce.
Sharp falls are also seen in prices of base metals like copper and aluminium as well as agriculture commodities such as corn, soybean, wheat and crude palm oil (CPO).
The International Monetary Fund (IMF) in its latest survey last Thursday said prices of most commodities should ease due to softening demand as global growth is expected to decline these two years.
“Unless there is a substantial global downturn, the extent of easing may be small, given the current tight supply in some commodity markets,” it said.
IMF said while further price increases for wheat and tin this year were not surprising given supply shortage, the continued strong increase in prices of other commodities was unexpected.
In particular, oil prices surged from around US$90 a barrel in late January to over US$105 by mid-March, surpassing their previous record high in constant prices set on December 17, 1979. Base metal prices also rebounded after falling during the second half of 2007.
In previous global downturns, IMF said commodity prices would decline sharply; suggesting a “disconnect” between commodity prices and the ongoing slowdown of the global economy.
However, it added that much of the apparent disconnect reflected the fact that developing countries, which have been responsible for the bulk of recent commodity demand growth, had so far been less affected by the slowing growth.
“The resilience of high commodity prices will depend on the extent of spillovers of slowing growth in advanced economies to the rest of the world,” it said.
IMF said commodity prices fell recently as investors who have poured a record amount of money into raw materials this year fled into cash and short-term US treasuries and bonds.
On the local front, the downtrend in prices of CPO, tin and rubber mirrors the overall bearish sentiment in the global markets.
Industry analysts contacted by StarBiz expect local commodity prices to undergo further corrections to a more stable price level.
Analysts concurred that the price of CPO was fundamentally justified at RM3,000 per tonne.
HLG Research, which downgraded the plantation sector to a “negative” call, said big cap plantation stocks were too expensive in relation to potential risks of a volatile global commodities market
The brokerage said the big cap's share prices implied a long-term CPO price of RM2,500 to RM2,700 per tonne.
It said financial investors now accounted for about 50% to 60% of the CPO futures market instead of the “real” players like international trading houses and planters.
“The unquantifiable risk from purely liquidity-driven pricing, and the exposure to US credit problems (should be noted),” HLG said.
Aseambankers, which de-rated the sector to an “underweight”, is maintaining the average CPO price forecasts at RM2,800 in 2008 and RM2,500 in 2009.
The brokerage said: “Amid perceived uncertainties over local politics post-election, foreign investors are taking profit after a few years of positive returns and reducing their positions in Malaysia.”
One short-term consolation for CPO price is India's latest move to cut the duties on vegetable oil imports to improve its tight supply situation.
Traders however are worried that China may turn to its domestic reserves and reduce imports of vegetable oils as it explores new measures to curb rising food prices.
Last Friday, the benchmark June CPO futures contract closed at RM3,330 per tonne, about 25% lower from its record of RM4,486 per tonne on March 4.
Meanwhile, tin price on the Kuala Lumpur Tin Market soared to its all-time high of US$20,800 per tonne on March 17 before closing lower at US$19,950 last Friday taking its cue from the lower tin price on the London Metal Exchange.
A trader said tin was likely to be traded on a higher note in the first half this year, albeit at a slower pace, underpinned by supply problems from major producers, Indonesia and Congo.
Indonesia since last year had actively clamped down its illegal tin mining activities, especially in Bangka Island, while Congo last week suspended all mining activities in its tin ore-rich Walikale district of North Kiyu province to bring stability to the mining area.
On rubber, a trader with a local rubber conglomerate said local prices would depend on rubber prices on Tokyo Commodity Exchange, the global benchmark for rubber.
He said there were uncertainties both in the global and domestic markets. Currently, it is wintering season in top producing countries like Thailand and Malaysia, where production is expected to remain low.
The trader said: “Despite anticipation of lower production, the sentiment in the market remains weak given the volatile commodities market worldwide.”
In 2006, tyre grade SMR 20 rubber touched its all time high of RM9 per kg. Prices have since stabilised around RM8 per kg currently.
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Moolah
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Posting #2: Sat Mar 29th, 2008 05:25 |
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There’s still oil in the tank
For some time, commodities seemed to be an unstoppable force. Then came the recent selldown. However, the robust global demand is likely to keep the rally alive, writes TEE LIN SAY.
UP until mid-March, commodities were an asset class that reigned supreme and were virtually unscathed by the roller coaster ride experienced by the financial markets.
 Klavers: Fossil fuel still dominate world’s energy portfolios.
Since the beginning of the subprime problems in the US last July, nearly every form of investments – be it equities, bonds or properties – have taken blow after blow as investors fretted over the possibility of a global economic slowdown.
Emerging markets perhaps have been roiling the most. With these bourses having enjoyed rapid and euphoric runs in the last few years, it isn't exactly a pretty sight when the pendulum swings the other way. On a year-to-date basis, Asian bourses have averagely retraced by an alarming 20%.
Even for the more conservative asset class of bonds, yields have been dipping low as investors rush for a flight to quality. For example, the 10-year note is now yielding 3.7% from 4.25% in December. This drop is also partly attributed to the strengthening ringgit.
Properties have not been spared. All over Asia, notably in Singapore, Hong Kong and Vietnam, the ability to make quick profits in property has disappeared. Gone are the days of house-buyers queuing to capitalise on the real estate boom and investors flipping properties before their completion.
The subprime and credit fears brought easy wealth creation to a screeching halt. As the cautious investor adopted a more defensive stance, the new buzzword was commodities. Not only was this an asset class that acted as a natural hedge against the weakening dollar, it was also a protection against inflation.
After all, inflation has long been the devil that threatens to derail growth across the globe.
In Malaysia, inflation in February accelerated 2.7% year-on-year (y-o-y), the fastest pace in 12 months, led by increases in food prices. Singapore’s recent CPI (consumer price index) increase hit a 26-year high in January at 6.6% y-o-y and China’s CPI rose 8.7% y-o-y in February to reach an 11-year high.
 Wyke: We are at an early stage of extended rally.
So, certainly, the appeal of commodities was very real. Given the volatility in equities, credit, bonds and real estate, why not invest in something tangible that also acted as a natural hedge against inflation?
Most commodities had extremely heady runs throughout 2006 and 2007. With the strong economic growth in China and India, commodities have been creating headlines as they record new all-time highs. Think crude oil, palm oil, gold, silver, wheat and soybean, among many others.
Not surprisingly, with the US economy still turbulent, analysts were recommending investors to diversify into commodities, predicting that prices would continue to remain firm on the back of robust global demand.
Commodities come a cropper
Then it happened last week. Commodities got hit.
After a long period in which it had been invulnerable to the turmoil of the US economy, commodities finally took a frightful plunge following the Federal Reserve's dramatic moves to support the US financial system.
At the time, commodities had been soaring on fears that the low US interest rates would further weaken the dollar and let inflation run rampant. The Fed's move to cut rates on March 18 helped assuage fears that inflation wasn't such an ugly spectre.
Black gold touched its peak of US$111.80 on March 13, and retraced to below US$100 when the selloff began. Nonetheless, as of press time, Nymex oil is back up at US$105.
 Teng: Commodity prices will find their fair levels.
Gold touched its all-time high of high of $1,030.80 an ounce on March 17, and was sold down by more than 10% during the correction. It has since jumped back up, and as of press time, is recording its one-week high of US$954.50.
Meanwhile, palm oil futures in Malaysia have risen 70% in the past one year and reached a record RM4,486 a tonne on March 4. The one-month contract is now trading at RM3,613.
Of course, even with these sharp declines, commodity prices are still way above their prices compared to a year ago. Oil for example, still trades 80% higher.
Nymex crude oil futures were up US$4.61 to US$105.83 per barrel last Wednesday following the weekly US Energy Department report that showed stocks were unchanged at 311.8 million barrels. This shows that stocks are at average levels for this time of the year.
Over the week, wheat, corn and soybean rebounded on speculation that demand for grains for food and fuel will outstrip supply as poor weather cuts crop yields in the US. Gold is rebounding on buying by jewellery makers.
Analysts say the commodity backlash resulted more from a strengthening US dollar and reduced inflation expectations, rather than a change in the underlying supply and demand fundamentals. “Once equities start recovering, so will commodities. We expect to see firm prices,” says one palm oil analyst.
High oil prices are here to stay
So what ought to be the investment strategy under such trying periods? Well, adding a spoonful of commodities to one’s portfolio not only lowers risk but also may slightly enhance returns over the long term.
Theoretically speaking, commodities benefit from times of political uncertainty, climate changes and rising inflation. They also have low or negative correlation with other asset classes.
The other thing is that, with the world population swelling and the growth of the emerging markets, per capita consumption and oil imports are on the rise.
China and India, for instance, which are now the fastest-growing economies in the world, make up 40% of total world population. With vehicle demand doubling by 2030, and the use of alternative energy sources still at its infancy, it will be a challenge for supply to match the demand.
Hart Energy Consulting managing director Kristine Klavers points out that 99.8% of today's vehicles still use conventional liquid fuels. “Global demand for primary energy is growing. The challenge is to meet demand and reduce environmental footprint. Fossil fuels will continue to dominate the world's energy portfolios,” she says.
The use of biofuels in Asia as a percentage of fuels supply will still be minimal, estimated at about 5% come 2025. In North America and Europe, biofuels could account for an estimated 10%. Klavers acknowledges that sugar cane or palm oil offers advantages as alternative energy sources.
Bullish on commodities
Commodities have been partying in the last few years. Since 2003, crude oil has gone up 250%, corn 130%, copper 46% and gold 174%. Will there be more of these substantial gains to look forward to?
Christopher Wyke, product manager for emerging market debt at Schroders, says in an inflationary environment, commodities are a core necessity in an investor’s portfolio to hedge against high energy bills.
“We are at the early years of an extended rally. Historically speaking, looking at the last 200 years, the rally for commodities normally lasts for about 15 to 20 years,” he says. He is especially bullish on commodities in today's scenario, as there are fewer sources of energy and metals.
Most commodities take longer to find and longer to produce. “There are now also stricter environmental controls. These result in delayed production coming on-stream. Hence, this is creating a supply constraint on commodities,” he says.
“A lot of this demand, especially for agricultural commodities, comes from the developing nations, for instance, China, which is growing very rapidly. We are still in the early years of the commodity cycle. We are in Year 6 for energy, Year 4 for metals and Year 2 for agricultural.”
On a macro basis, Wyke says the strong demand for natural resources, particularly from developing economies, will remain a key support for rising energy, metals and agriculture prices.
“On the supply side, many inventories are at or close to record lows. Furthermore, the quantity of the world’s arable land continues to steadily decline due to issues such as desertification and urbanisation within developing countries,” he adds.
Within the grains sector, Wyke expects corn and wheat to continue to deliver the best returns, while in materials and fibres, he believes the prospects for US cotton prices are good.
Wykes remains bullish on the oilseeds sector, particularly the soybean crop. Demand, especially from China, is anticipated to continue to exert pressure on supply.
“Elsewhere in the oilseeds sector, the outlook for palm oil is attractive. In terms of use, it is the fastest growing vegetable oil in Europe given that it is a non-trans fat oil and a major source of biodiesel in Asia. Palm oil is also cheaper than soybean and rapeseed.”
However, Wyke is less excited about crude oil. He sees it as the least attractive commodity as it has risen very sharply. “With short-term inventories at high levels, oil prices could drop by US$20 from present levels,” he says.
Within the metals sector, Wyke strongly favours precious metals. “Gold will be a beneficiary of the falling dollar, inflation and the turmoil in the US banking system,” he argues. Other precious metals such as silver and platinum are also expected to make further gains in 2008.
Within base metals, one has to be selective in seeking opportunities. For instance, copper prices have experienced strong gains on the back of ongoing growth in developing economies. Wyke expects this trend to continue over the medium term.
CPO still strong
HwangDBS Investment Management Bhd chief executive officer and executive director Teng Chee Wai says there is evidently some element of speculation in the commodity space. Nonetheless, he believes that in the next six to nine months, prices will find their fair levels.
He adds, “I would think that approximately 20% to 30% of commodity traders are speculative in nature. Unlike equities, commodities are about demand and supply. They will find their equilibrium, especially once physical delivery of the commodities take place.”
He still favours crude palm oil (CPO), as it is a cheaper compared with other vegetable oils. Hence, should other vegetable commodities continue to appreciate in price, CPO will be viewed as a cheaper substitute.
“It is also raining nearly everyday in recent times. The weather is changing. This will affect yields and hence, supply. Due to environmental issues, the available acreage for plantation is also limited,” he says.
Teng views the recent pullback in commodity prices as a healthy correction. He also opines that investors can seek exposure in CPO through commodity stocks.
Another analyst from a foreign house does not see CPO prices going very far from present levels. After all, prices have been moving almost uninterrupted from RM1,396 in September 2006 to the present levels of RM3,613.
Says the analyst, “I think the demand will slow down. The current price is actually reflecting the demand and supply for palm oil. It is unlike wheat and soybean, which have very real fears of being in limited supply. The April-June period is also a high-supply period. So we don't see prices going up.”
Rising prices of food commodities have been fuelling inflation from the US to China and India. China has increased imports of raw materials and boosted stockpiles to cool prices.
Meanwhile, Korea and India announced the removal or reduction of tariffs on some food commodities in the past week to keep inflation in check. Physical demand has picked up since the price drop.
“The amount of planted acreage is also on the increase. Once Indonesia comes out with this additional acreage, we will see prices coming down as supply matches demand,” says the analyst.
One thing to look out for is the March 31 planting intentions report by the US Department of Agriculture. This report will indicate whether there be an increase or shortage in the supply of soybeans.
As all edible oils are substitutes for among each other, the outlook for the soybeans supply will be somewhat similar for palm oil.
An Oil World Weekly report on March 20 says it does not see much additional downward potential in oilseed and vegetable oil prices at current levels, particularly as long as there is considerable concern about global supplies in 2008.
The weak US dollar and the record crude mineral oil prices are supportive of vegetable oils, oilseeds and meals.
“Palm oil prices are likely to recover soon but will probably not return to the recent peaks in the foreseeable future, given the relatively large current stocks in Malaysia and elsewhere,” says the report.
In the past, seasonal fluctuations of CPO production and its stocks in the key producing countries, mainly Malaysia, had a direct impact on prices. This production surpluses and rising stocks translated into price pressure.
“However, this relationship did not apply in recent months. Palm oil prices rose to new highs at a time when Malaysian palm oil stocks were at record levels,” says Oil World. Also, world stocks of palm oil are estimated to be relatively comfortable and are up by 0.4 million tonnes, at an estimated 5.3 million tonnes as of end-March 2008.
This change in pricing pattern is because the producers are focused more on future demand and are willing to ignore temporary production surpluses.
To a large extent, palm oil prices have followed crude mineral oil prices in recent months, although palm oil actually plays only a minor role in the energy sector
Says Oil World, “We estimate world production of palm oil at 42.2 million tonnes in Jan/Dec 2008, a boost by 4.1 million tonnes on the year. In Malaysia, production is forecast to rise by 1.5 million tonnes to 17.3 million tonnes this year.
“However, following exceptionally high yields per hectare, we expect a significant reduction of the production growth rates from July to Sept 2008 onward.”
According to a report by the Malaysian Palm Oil Board (MPOB) on the industry's performance for February, production declined 13.8% to 1.23 million tonnes last month amid a normal seasonal downcycle. On a y-o-y basis, the February production was up 24.1% compared with the first half of last year, when production was affected by adverse weather.
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MooFassa
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Posting #3: Sat Nov 1st, 2008 11:31 |
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Published: Saturday November 1, 2008 MYT 9:43:00 AM
Updated: Saturday November 1, 2008 MYT 12:49:13 PM
Commodities tumble on strengthening US dollar
NEW YORK: Gold prices tumbled Friday - the final day of a volatile month that saw commodities prices battered by a strengthening dollar.
Other precious metals, oil and agriculture futures also fell.
Concern over weakening economies overseas has undermined the euro and invigorated the greenback in recent weeks, prompting investors to shift funds into the dollar and out of commodities, which are often used as a hedge against inflation.
"It was just a horrendous month,'' said Matt Zeman, chief market strategist at LaSalle Futures Group in Chicago.
"The dollar has been on quite a tear for the last six weeks or so. Until it stops or until it starts to reverse it's going to continue to hurt commodities prices.''
Gold for December delivery fell $20.30 to settle at $718.20 an ounce on the New York Mercantile Exchange. Gold prices shed 18 percent in October.
December silver fell 5.50 cents to $9.730 an ounce, after falling as low as $9.20 earlier in the session.
December copper futures, meanwhile, fell 6.15 cents to $1.8290 a pound. Silver prices lost 21 percent during the month; copper fell about 37 percent.
Oil prices logged their biggest monthly drop since futures trading began 25 years ago, on concerns that a contracting U.S. economy will cripple demand well into next year.
While oil prices ended the month down 33 percent, they managed to post a slight rebound late in the day.
Light, sweet crude for December delivery rose $1.85 to settle at $67.81 a barrel, after earlier falling as low as $63.12.
Prices closed at $100.64 a barrel on the last trading day in September.
In other Nymex trading, gasoline futures fell 2.57 cents to $1.4413 a gallon, while heating oil rose 8.46 cents to $2.0842 a gallon.
Agriculture futures also declined.
December wheat futures dipped 1.75 cents to $5.3625 a bushel on the Chicago Board of Trade, while corn for December delivery fell 8 cents to $4.0150 a bushel.
January soybeans shed 10 cents to $9.33 a bushel, after falling as low as $9.18 a bushel earlier in the session.
On Wall Street, the Dow Jones industrial average rose nearly 150 points. Other major indexes also rose.
The dollar advanced against other major currencies, including the euro and the British pound.
The yield on the benchmark 10-year Treasury note was 3.96 percent, down from 3.97 percent.
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