Commodities carnage slows
By Stephen Wyatt
For the first time in almost two years, Australian
commodity prices have stopped their suicide dive. They
are now tracking sidewise and a number of analysts are
suggesting the worst may be over for commodities.
If so, despite last week's strong sell-off, the commodity
sensitive Australian dollar could be triggered higher to
retest US65¢ and eventually US70¢, said Mr Rob
Henderson, chief economist in Sydney with Dresdner
Kleinwort Benson.
Australian commodity prices, measured by the Dresdner
Commodity Price index in currency neutral Special
Drawing Rights (SDR) terms, slumped dramatically over
the period September 1997 to September 1998 as
Asia's economic collapse sent markets into a tailspin.
Commodities lost 25 per cent of their value.
But since September last year, Australian commodity
prices have traded sideways, albeit near historically low
levels. This could be an early indication that these
markets are now bottoming.
Some commodity consumers are thinking this way. A
major German car manufacturer and client of Dresdner
Bank in Germany has just locked in aluminium prices for
five years ahead, Mr Henderson said.
The Dresdner commodity price index, like the Reserve
Bank of Australia, Commonwealth Bank and ABARE
commodity price indices, measures the prices of
Australia's major commodity exports and weights these
according to their contribution to total exports.
These indices are more relevant measures of Australian
commodity prices than the widely followed Commodity
Research Bureau index of 17 US commodity futures
markets.
They also have a much stronger correlation with
movements in the Australia-US dollar exchange rate.
While Australian commodity indexes in SDR terms are
flattening and showing early signs of bottoming, the CRB
index collapsed on Friday to its lowest level for 24 years
on the back of weak grains, sugar, cotton and oil prices.
But no one, except perhaps some US hedge funds who
have been keen buyers of the Australian dollar over the
past month on the belief that non-Japan Asia is beginning
to recover, is actually bullish commodities -- yet.
"We doubt [that commodities have bottomed] . . . and
technical indicators point to further weakness to go along
with the negative global macro-economic fundamentals
that have pressured commodities for months," said Mr
Bill O'Neill, futures strategist with Merrill Lynch in New
York.
"At this juncture, we are still looking at the fourth quarter
or first quarter 2000 for a potential bottoming in
commodity prices, but even that may be a bit optimistic,"
he said.
The key to a commodities recovery is a recovery in
global demand. While the US economy continues to
boom, ongoing problems in Asia, Brazil and other
emerging markets along with evidence of slowing growth
in Europe point to slack demand for both agricultural and
industrial commodities for the next six months, Mr
O'Neill said.
But there are a few bright spots appearing in Asia,
including noticeable improvement in South Korea and
Thailand. Japan, however, remains mired in recession.
Australia's exports to Japan and South Korea have
recently recovered after dropping precipitously through
to mid-1998 and South Korean industrial production
rose by 4.7 per cent for the calendar year 1998 against
1997.
In the base metals sector "there is a growing view that we
could be nearing the bottom", said Mr Jim Lennon,
London-based commodities strategist for the Macquarie
Bank group.
This was emanating from possible supply cuts in copper
mine and smelter production in the US (Highland Valley
and across the south west) and South America and
growing optimism about US economic growth, he said.
The giant Chilean producer Codelco, announced plans
last week to cut costs from US45¢ a pound to US40¢/lb
by reducing production at its highest cost mines,
especially the Andina Mine.
There are also rumours that, in the US south-west, a
number of mines and smelters could close, including
BHP's Robinson and San Manuel mines and its San
Manuel smelter.
The prospect of a large draw-down in Singapore London
Metal Exchange stocks due to increased demand from
China was also buoying sentiment, said Lennon.
Consensus forecasts of 1999 US growth have picked up
from around 2.3 per cent at the end of 1998 to around 3
per cent now and forecasts of world growth have risen
from 1.4 per cent in December to over 1.6 per cent now.
If correct and if Asia can muster a recovery, the worst is
in for commodities.
afr.com.au
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