Signs emerge that bottom is near
Commodities,
By Stephen Wyatt
A rally in base metals coupled with continuing strong
growth in the US, signs of recovery in Korea, firmer
Asian currencies, booming global equity markets and
rallies by the commodity-sensitive Australian and
Canadian currencies have some traders and analysts
asking whether commodities have bottomed.
Certainly the World Bank doesn't think so. In a report on
commodities released last week it argues that the surging
supply of commodities, due to rapid technological
advances, will keep real commodity prices in 2010
below their 1997 levels.
The bank expects commodities prices to continue to fall
relative to those of manufactured goods.
Most other analysts, while not undertaking such
long-term forecasts, are not nearly as bearish about the
prospects for commodities. Nevertheless, while
encouraged by recent events, most remain cautious about
a rally.
"We are approaching the bottom in the (commodities)
complex. The question now is how long will we stay
there," said Dr Alan Heap, commodities analyst with
Salomon Smith Barney in Sydney.
"We find it difficult to justify a very bullish outlook," said
Mr Jim Lennon and Mr Adam Rowley, commodity
analysts in London with the Macquarie Bank group.
"There is upside, but any rally in the near term is likely to
be metal (commodity) specific, rather than a general
recovery."
While the US economy is strong, with GDP growth up
by an annualised 5.6 per cent in the fourth quarter and
leading economic indicators pointing to further growth,
"the European metals markets are showing clear signs of
weakening, with orders for aluminium and copper
continuing to deteriorate", warn Mr Lennon and Mr
Rowley.
Concerns about the Brazilian economy and its effect on
the rest of Latin America, also weigh on commodities.
Also, world growth -- a major driver of commodity
markets -- is hardly supportive of a commodity price
recovery this year. Industrial production is generally
projected to grow this year by about 2 per cent. This is
half the trend growth rate and not enough to trigger
commodity prices higher, said Mr Damien Hackett,
commodities analyst with CSFB in Melbourne.
As for Asia, including Japan, while the worst may be
over, with output this year probably the same as last year
(zero, not negative, growth), "no-one is forecasting Asian
growth to get back to 1996 levels of over 8 per cent".
Nevertheless, for the first time in two years there are
some signs of recovery in Asia, and a recovering Asia is
nuclear fuel for world growth.
SAs long as the US economy holds up, Asia is the key to
future commodity prices. "There is fairly conclusive
evidence that the Asian crisis triggered a severe shock on
the demand side of the commodity equation, effectively
wiping out the largest incremental source of consumption
growth in these markets in the 1990s," said Dr Stephen
Roach, chief economist with Morgan Stanley Dean
Witter in New York.
Asia does matter. An International Monetary Fund study
(May, 1998) found that non-Japan Asia accounted for
about 65 per cent of the total growth in worldwide
industrial commodity consumption in the pre-crisis years
1992-96.
For oil, Asia accounted for 70 per cent of the growth in
global demand over this period, said Mr Hackett. "And it
accounted for somewhere between 50 and 100 per cent
of the increase in the demand for metals, depending on
what metal you take," he said.
"In other words, the crisis economies of Asia were, by
far, the most commodity-intensive consumers in the
world, accounting for an enormous increment of the
growth in overall commodity consumption that is nearly
three times the region's 23 per cent share of world GDP,"
said Mr Roach. "Not surprisingly, as Asia went,
commodity prices were quick to follow."
Asia also has a massive effect on world economic
growth, not just commodity demand.
Before the Asia crisis, from 1990-97, non-Japan Asia
boomed at a growth rate of 8 per cent a year. This
accounted for about 55 per cent of overall world GDP
growth. Asia's share of world growth is, then, about 2
times its 23 per cent share of world GDP.
So where from here for Asia?
While Japan continues to contract, albeit at a slower
pace, forecasts of economic growth in Korea are being
revised upwards. The Bank of Korea now expects 1999
GDP growth to be 3.2 per cent, while the IMF expects 2
per cent growth, up from its October forecast of 1 per
cent.
"There is increased optimism in many of the main
(Korean) metals consuming markets," said Mr Lennon
and Mr Rowley. Domestic vehicle sales are forecast to
increase by 15 per cent this year and manufacturers plan
an increase of almost 20 per cent in vehicle output.
"If the world slowly begins to heal, as we suspect, I
would not be surprised to see a meaningful rebound in
commodity prices commence at some point in the second
half of 1999," said Mr Roach.
Morgan Stanley forecasts global growth accelerating to 3
per cent in 2000.
afr.com.au
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