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Strategies & Market Trends : Commodities - The Coming Bull Market -- Ignore unavailable to you. Want to Upgrade?

To: craig crawford who wrote (836)	10/10/2001 6:31:25 PM
From: craig crawford	Read Replies (1) \| Respond to of 1643

Commodity Prices Signal More Tough Times Ahead thestreet.com By Howard Simons Special to TheStreet.com 10/03/2001 02:17 PM EDT Real commodity prices should trend lower over time to reflect increased production efficiencies. A striking, but hardly unique example of this, is the 85% drop in real wheat prices since 1946. (Over the same duration, the world's population grew from 2.5 billion to 6.1 billion.) Commodity-price spikes, such as the recent one in energy, are self-correcting as they stimulate both demand conservation and new production. However, commodity-price deflation caused by macroeconomic recession reflects an unwelcome set of circumstances. Let's update a chart from last April, one comparing London Metals Exchange prices for three-month forward copper and the S&P 500; the date when I said metals prices were still headed lower is marked on the chart. While copper is used in this example, the same story would be told by aluminum, nickel and zinc -- but not by lead or tin -- prices. Copper prices never took the bait of an expected economic recovery in the third quarter of 2001 the way stock prices did last spring; after all, we can express hope and confidence for the future with our equity investments, but copper buyers have no room for such sentimentality. The demand is either there or not. During last week's relief rally in stocks, nickel prices hit a new low for the year, and both copper and aluminum approached theirs. If there's a global recovery in manufacturing demand, it's news to metals buyers. The Ugly My previous column on metals prices offered three ways to tell whether commodity prices have bottomed: Have prices fallen below the marginal cost of production? Has the forward curve of futures prices moved toward a deep carry, wherein the prices of distant futures are well above near-month futures? Are the stocks of primary producers rising faster than the market as a whole? Of these, the third method is the most reliable. Let's take a look at the six-member Bloomberg U.S. Mining Index in comparison to the S&P 500. The index includes Apex Silver (SIL:Amex - news - commentary - research), Brush Engineered Materials (BW:NYSE - news - commentary - research), Kaiser Aluminum (KLU:NYSE - news - commentary - research), Phelps Dodge (PD:NYSE - news - commentary - research), RTI International (RTI:NYSE - news - commentary - research) and Titanium Metals (TIE:NYSE - news - commentary - research). The picture is discouraging, to say the least. The mining index took the bait even more than the S&P 500 did in the spring rally on hopes of a macroeconomic recovery, but its recent descent has been far sharper and deeper than the broad market's. If metals prices are sensitive leading indicators of economic growth, and if the equity market is doing its job of discounting future earnings properly, we've still got a rough road ahead.