Commodities Heading Toward Biggest Rally Since 1983 (Update1)
By Claudia Carpenter
New York, Sept. 2 (Bloomberg) -- Prices of commodities from crude oil to cocoa are having their strongest rally in 19 years in a jump that analysts and investors say shows few signs of ending as supplies tighten.
A three-month drought in the Midwest has dimmed prospects for U.S. crops and sent corn and soybean prices up by almost a third this year. Crude oil is up 46 percent on concern the U.S. will attack Iraq, disrupting Middle East exports. Gold, which languished for years, is up 13 percent as investors sought refuge from tumbling stocks.
``Prices have been going crazy,'' said Gilbert Raske, a director at JGC International LLC, a Chicago-based exporter of grain, fertilizer, coal and fuel. ``Our customers are much more aggressive about securing supplies'' than they were before the rally, said Raske, whose company recently won a contract to supply corn to South Korean livestock-feed companies.
The Reuters-Commodity Research Bureau index, which measures 17 commodity futures markets, rose 1.79 to 219.20 on Friday, the highest level since May 2001. The index, rebounding from a two- year low last October, has gained 15 percent so far this year and is heading toward its biggest rise since 1983.
Another benchmark, the Goldman Sachs Commodity Index, which is weighted toward energy and includes more industrial metals, is up 27 percent this year. In comparison, the Standard & Poor's 500- stock index has declined 20 percent so far this year.
Corn has surged 28 percent this year and soybeans are up 29 percent. Prices have been climbing partly because overseas processors have been eager to lock in shipments before prices climb even higher, traders said.
``Commodities are up because supplies are down,'' said Paul Kasriel, chief economist at Northern Trust Securities in Chicago. ``Next year we'll probably see some commodity prices go even higher.''
Cotton Mills
A 31 percent rise in cotton prices this year probably won't start showing up in higher jean prices for at least another year, some buyers said.
Cone Mills Corp., the world's biggest denim maker, locked in cotton prices when they were at a 29-year low last year because of record world production. The purchases have allowed the company to reduce its cotton costs by about a third from last year, said Scott Wenhold, treasurer of the Greensboro, North Carolina-based company.
``We're always hedged 12 months out, so the higher prices won't start to impact us at least for another year,'' Wenhold said. ``And that's assuming we couldn't pass on the higher costs'' to customers.
Few manufacturers stuck with paying higher raw-material costs have been able to raise the price of their products.
U.S. economic growth slowed to an annual rate of 1.1 percent in the second quarter from 5 percent in the first quarter, the Commerce Department said. The slowing economy has kept producers from raising their prices for fear of losing business, analysts said.
`Damper' on Prices
``If anything, the weak global economy has been a damper for commodity prices,'' said William Byers, senior managing director at Bear, Stearns & Co. in New York. Prices have been climbing this year largely because of reduced supply, not demand, he said.
Placer Dome Inc., the world's sixth-largest gold producer, plans to reduce by 20 percent the amount of gold it sells before it's mined, a strategy gold companies use to lock in prices. The practice, used to help companies avoid price declines, also keeps them from benefiting from rallies.
Gold will probably rise further this year ``as we go into the holiday seasons in the West and the marriage season in India,'' Wayne Murdy, chairman and chief executive of Newmont Mining Corp., said on Bloomberg TV. Newmont is the world's largest gold producer.
Unlike gold and agricultural commodities, petroleum prices have been climbing for political reasons.
Iraq Concerns
Crude oil prices in New York are close to $29 a barrel after rising to an 18-month high above $30 in August on concern that supplies from Iraq or its Persian Gulf neighbors might be disrupted by U.S. military action.
Estimates of the so-called war premium vary between $1 a barrel to as much as $8, analysts said.
``If oil is at $29 then maybe $4 to $5 is related to bullish market psychology, which is principally related to Iraq,'' said James Burkhard, associate director of Cambridge Energy Research Associates in Boston.
Members of the Organization of Petroleum Exporting Countries will gather in Osaka, Japan, on Sept. 19 to decide on oil production levels for the final three months of the year.
Saudi Arabia, the world's biggest oil exporter and most influential OPEC member, wants to raise output, an OPEC official has said. An increase might stunt this year's rally, analysts said. Most other members of the group favor keeping production levels unchanged.
``If we take into account reports on inventories of crude and products, existing supplies'' are sufficient, Ali Rodriguez, president of Venezuelan state oil company Petroleos de Venezuela SA, in an interview with Union Radio. Venezuela is OPEC's third biggest member, after Saudi Arabia and Iran. |
