Positive outlook for major commodities in 2008(ZT)

Positive outlook for major commodities in 2008

12/18/2007 1:50:00 PM ET    
Hindu Business Line 

Home Page - Commodities - Outlook Global economic growth to guide base metals

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Barclays Capital expects the annual average of oil prices to rise in 2008.

Strong medium-term uptrend predicted for gold.

Further upside to prices is expected for cotton. G. Chandrashekhar

Mumbai, Dec. 18 Commodity markets have remained relatively strong in the current year with price performance of select commodities setting new record or reaching multi-year highs.

While tightening demand-supply fundamentals influenced the crude market, gold attracted considerable investor interest for a host of reasons. Agricultural commodities too displayed unprecedented price action, supported by burgeoning demand from the bio fuels sector and lower production following competition for acreage and weather aberrations.

At the end of 2007, the global financial markets are seized of credit market concerns, threat of a US slowdown and steadily weakening dollar. What does 2008 hold for the commodity markets? Barclays Capital Research in its latest report Global Outlook - Implications for financial markets crystal gazes into the future.

Base metals: If global economic growth assumptions remain relatively firm, 2008 could be another year of strong consumption prospects for base metals, with emerging markets plugging OECD weakness; and looking forward, rising production costs, low inventory levels and relatively sparse market balances mean that long-term metal price prospects are still good, Barclays Capital Research said.

In base metals, the sentiment has been shaken by concerns over the global economy, and thereby metals consumption. Lacklustre physical markets have added to the downside price pressure, with lower physical premiums and rising exchange inventories contributing to perceptions of easing supply tightness, the report pointed out.

In the short-term, however, base metals will continue to be the sector most sensitive to global growth prospects, and further price declines are likely, should sentiment continue to deteriorate. Within the base metals complex, aluminium is likely to prove the best exposure in deteriorating growth environment due to the proximity of current prices to production costs. In an environment of improving sentiment, copper is likely to outperform as it has the mot significant supply constraints in the base metals sector, Barclays Capital asserted.

Gold: As regards precious metals, the key price determinants for gold remain increasingly positive amid gold-favourable market conditions, the report noted adding external factors such as stronger euro/dollar, buoyant oil prices and the sensitive geopolitical environment coupled with additional catalysts of expectations of slower US growth momentum and ongoing credit concerns have the potential to continue to drive prices to fresh 28-year highs.

Strong physical and investor demand emerging upon price dips should provide a solid footing for prices. Coupled with rapid sustained build in ETF positions, this outweighs the two bearish factors for gold, of a slowdown in producer de-hedging and pick up in central bank sales. While speculative length in gold is high and, there is potential for short-term price corrections, there is a strong medium-term uptrend for gold.

Crude: Barclays Capital expects the annual average of oil prices to rise in 2008, the seventh successive year of price increase. Demand is expected to remain relatively lacklustre, as it has been since 2004, although year-on-year weather effects help to imply a faster rate of demand growth than that seen in 2006 and 2007 even with an economic slowdown.

Demand growth remains highly skewed to the West Asia and emerging Asia. Non-OPEC supply is expected to struggle again, with no net growth forecast for 2008. Accompanied by a cautious policy from OPEC, the net result of the supply and demand dynamics is expected to be a further gradual tightening of the market, the report observed.

Agriculture: As far as agricultural markets are concerned, Barclays Capital holds a positive bias on the grains complex as a whole in the light of the low inventories across most of the markets and positive demand from the food, feed and fuel sectors.

Specifically, through much of 2007, corn (maize) prices have been weighed down by surging US acreage planted this year but prices have started trending higher with investors looking beyond the near-term supply surge to the positive fundamentals of the market highlighted by robust demand from China, strong US ethanol demand and low inventories. Soyabean price strength has been underpinned by reduced planting acreage in the US this year (with the additional acreage having been planted to corn).

Barclays Capital said it continued to view cotton positively and anticipate further upside to prices on the back of a combination of robust Chinese cotton demand to fuel its expanding textiles industry and indications of reduced US acreage. More Stories on : Commodities | Outlook Article E-Mail :: Comment :: Syndication ::