CRB index slumps back
towards its 21-year low
Commodities,
By Stephen Wyatt
Deflation is thriving in commodity markets. Commodity
prices, led by slumping crude oil, cotton, US livestock
markets and soft base metal markets, fell back towards
their lowest level in 21 years on Friday.
The prospect of a slowing global economy next year
continues to weigh on world commodity markets.
But last week the strength in the US dollar, oversupply in
the world oil market, poor US commodity export
performance due to the strength in the US dollar and
over-production in the metals markets relative to current
slow demand conditions, all combined to knock the
widely-followed CRB commodity price index -- an index
of 21 US commodity futures markets -- back down
towards its 21-year lows, hit last August.
Crude oil led the charge lower. Brent crude oil, the North
Sea benchmark crude, fell to 12-year lows last week as
fears that this week's OPEC meeting would not result in
any further production cuts.
Venezuela, a prominent OPEC member is reportedly
now pumping oil at over 3 million barrels a day,
exceeding its 2.85 million barrel/day agreed quota set last
June. This "bodes for an acrimonious OPEC meeting,"
said Mr Michael Rothman, energy analyst with Merrill
Lynch in New York.
The world is awash with oil. "Oil inventories are expected
to remain high even in the event of a cold northern
hemisphere winter," he said.
While no base metal markets broke down through their
recent 11-year lows, copper and nickel remain at just
above these levels. "The mood in physical metal markets
is getting gloomier as evidence of a global growth
slow-down continues to mount," said Mr Jim Lennon and
Mr Adam Rowley, commodity analysts with the
Macquarie Bank group.
October's 5.5 per cent fall in global crude steel
production and the almost 7 per cent decline in western
world crude steel production indicated that global
industrial production growth turned negative in
September / October, Mr Lennon said.
These falls in crude steel production are the biggest
monthly declines this decade. With iron ore and coking
coal primary inputs to the production of crude steel, this
sort of production slump does not augur well for the iron
ore and coking coal annual contract price negotiations
currently underway between Australian producers and
Japanese steel mills.
"The short-term fundamentals for the metals in our view
look worse and worse, particularly for copper and
aluminium. More production cuts are needed to prevent
prices from sliding," Mr Lennon said.
World fibre markets are very soft. Polyester prices have
halved this year, cotton prices fell 7 per cent last week
and are retesting their lowest level for four years and
wool has halved in value this decade. The wool market is
under pressure again from weak synthetic and cotton
prices.
The recent interest rate cut by the US Federal Reserve
did nothing to inspire commodity markets, but even so a
number of analysts are cautiously friendly towards
commodity prices. The major reason is that commodities
have already dropped so far so fast that a lot of the bad
global recession-type news is predominantly prices into
these markets.
"Commodities are entering a transitional period that will
gradually result in a bottoming of prices followed by an
eventual move to an upside mode," said Mr Bill O'Neill,
futures strategist with Merrill Lynch.
But he said it "could be mid-1999 before there is
absolute evidence that the tide has turned".
Others remain focused on the economic turmoil in Asia
and slowing global growth next year. "It's way too early
to say that commodities have bottomed. But by end June
99 we expect to see some strength due to the impact of
Fed cuts coming through and bolstering demand,
especially for base metals," said Ms Michelle Giltrap,
economist with Dresdner Kleinwort Benson.
Similarly, Mr Michael Workman, international economist
with the Commonwealth Bank, said commodities will not
go up short term but will most likely trade in an erratic
sideways direction.
Despite the cuts in interest rates that aims to bolster
global growth, he says that investor and bank obsession
with averting risk could work against recovery. "I don't
feel all that optimistic about Asia. The big issue of risk
aversion is still there . . . The Japanese banks just don't
lend anymore. They have withdrawn from a lot of lending
syndicates," he said.
Even if central banks keep cutting interest rates, the rising
unwillingness to take on risk and lend could perpetuate
the current recession and continue to dampen commodity
markets.
afr.com.au
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