Supply shortages and China's appetite keep correction at bay
By Kevin Morrison
Published: December 30 2005 02:00 | Last updated: December 30 2005 02:00
After experiencing such a dazzling recent boom, commodity prices might be expected to feel the pull of gravity more sharply in the year ahead. But there still appears to be no shortage of analysts forecasting that the bull market in commodities will continue.
Oil and gold prices have already been on an upward trajectory in the past six years while industrial metal prices have recorded three years of double-digit gains. But some analysts believe strong demand will keep commodity prices from waning.
Take oil. The International Energy Agency recently forecast that global oil demand would rise at above average annual rates for the rest of thedecade. The US Department of Energy also expects US benchmark oil prices to average $64-$65 a barrel in 2006, up from $57 this year.
Goldman Sachs said this month that the world was at the start of the second phase of a three-stage oil super-cycle that would last until 2012. The investment bank is also bullish about other commodities. It picked buying gold as one of its top foreign exchange trades for next year, and predicted that bullion prices could reach $640 an ounce in the medium term.
Analysts said that the traditional trigger for a correction in surging commodity prices - a sharp economic downturn - also did not appear to be on the horizon. Higher commodity prices do not seem to be having a large negative effect on the global economy.
"All commodities bull markets have ended through a global recession and it does notlook like the world is heading into recession," said Jim Lennon, metals analyst at Macquarie Bank.
Mr Lennon said that the last significant metals bull run in 1989 ended with the collapse of the Soviet Union and the global recession of the early 1990s. The spike in oil prices in 1973-74and 1978-80 were also followed by big recessions. Mr Lennon said Chinese demand formetals was still outpacing expectations and would continue to support prices even if the rest of the world went into economic slowdown.
Mr Lennon said China had gone from accounting for between 7-10 per cent of world demand for the main base metals in 1993 to 20-25 per cent in 2003. Even allowing for a slowdown from current growth rates, China was likely to account for more than 30 per cent of world demand by 2010. "Even if demand was falling in the rest of the world, if China continues growing at current rates it would make up for the declines elsewhere," he said.
Supply is also unlikely to meet increased demand. The size of global inventories of copper, aluminium, lead, zinc and nickel are at their lowest level in decades. And a lack of large new projects to increase supply is a feature of both the oil and mining industries, with executives more focused onthe bottom line than on production volumes.
Another factor for the long lead time for mining projects to come into production is the extensive planning of projects to meet tighter environmental standards. In developing countries, miners are increasingly expected to provide social services such as education to local communities where poverty might be high. Such requirements add time and expense to mining projects, according to industry executives.
Mr Lennon said miners are also finding it increasingly difficult to increase production from existing mines or to add new capacity because of constraints including the lack of availability of tyres for mining trucks, shortages of manpower, and shortfalls in raw materials.
However, higher prices have already forced substitution, with plumbers and electricians seeking plastic and aluminium fittings as an alternative to the more expensive copper parts, while stainless steel producers are increasingly using more manganese as a cheaper alternative to nickel.
And the tight supply and demand balance in commodities may not translate into surging prices.
"It is going to take several years before stocks move back towards comfortable levels, which means that the market will stay tight and prices will therefore stay higher for longer, but it does not mean they will keep going up," Mr Lennon said. |
