Commodities price slump is easing, analysts say

  • By Thierry Ogier, Anthony Rowley
  • 10 Oct 2008
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The worst of the commodity price falls of recent months may now be over, leading commentators said in Washington yesterday.

The oil market is moving to a glut after a year of tightening, and prices may move towards the lower end of the range between $60 and $70 a barrel, Lawrence Eagle, JP Morgan’s global head of commodity research, said.

“It has the potential to go that low, but I suspect OPEC are going to be keener to keep it around current levels,” he told Emerging Markets. “The most critical factor is the speed with which OPEC react and their ability to keep prices at current level. But I suspect they do not want to be seen putting a lot of fuel on the fire while we have this current financial volatily.”

Oil, the most widely watched commodity, rose to $147 a barrel in July, and has fallen back below $90 since then, provoking speculation that it could continue down to $60 a barrel or even lower.

Eagle reckoned that psychology has played a role in the rapid decline. “The psychological aspect is quite important. If you hold stocks and you are in a bull market, these stocks are an asset. In a bear market, these stocks are a liability and you are more willing to hand those stocks to the market,” he said.

Lower economic growth prospects are already reflected in oil and metals prices, while food prices are likely to stabilise after their dramatic rise, Thomas Helbling, head of the energy and commodities surveillance unit in the IMF research department, said.

But Helbling suggested in an interview with Emerging Markets that oil may now be “close to bottom.” Much of the weakness in the global economy is “already factored in” to the oil price, he argued.

Oil markets, like those for metals, are already discounting the impact of a global economic slowdown on demand, he said. The reduced prospects for metals caused by a widespread fall in manufactured exports has resulted in a very sharp drop in prices over the past two months, Helbling noted.

Certain metals, such as aluminium, copper and others, should benefit as China and others promote construction projects to boost economic activity.

Meanwhile, some of the [upward] pressure is off food prices,” Helbling suggested. Food prices are generally “sensitive to the economy” and apart from the impact that reduced demand will have on prices, a good harvest this year has eased pressure on major grain prices and allowed inventory build-ups, he said. The drop in oil prices has also reduced fertiliser costs that had been putting upward pressure on some food prices.

Assessing the impact of falling commodity prices on different regions of the world is complex, Helbling noted. In Latin America, for example, all countries are importers of certain commodities but some are also exporters of foodstuffs and metals. Taken overall, it is a “wash”, he said.

He was less sanguine about Africa where metals exporters will suffer from reduced revenues while foreign investment in minerals will also drop.

The impact of falling commodity prices is also mixed in the case of the so-called BRICS – Brazil, Russia, India and China, Helpling suggested.

Those among them that are exporters of minerals will suffer from reduced industrial demand in advanced economies while less developed countries that export commodities to the BRICs will be victims of a “knock-on” effect.

  • By Thierry Ogier, Anthony Rowley
  • 10 Oct 2008

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