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Thread: Commodities

  1. #1

    Default Commodities

    All three in downtrends, as stated above in the Times article.

    Aluminium and copper. Kitco has suddenly decided to pack up for the day so the Al and Cu charts will have to be posted later.
    Aluminium and copper have both been supported, unlike the other metals. China isn't buying much in the way of copper at the moment due to the high price. Anyway, they don't need it as they can use Al instead, their Al smelters are running overtime and they will soon have enough to export as well. It will be interesting to see what happens to the Al price then.
    Copper is more interesting, what is keeping the price up, fundamentals(is India buying at these prices?)or hope that nobody has heard that it has rained heavily in Chile? Again it will be interesting to see what happens in the next few weeks.

    As for oil, well, that is even more interesting. Where there is speculation there is also fundamental shift. Nobody really knows the degree of speculation involved but what I find interesting is that the oil price has just risen and risen. Where is the profit taking? Has worldwide demand risen to such a level that speculators have been confident to just stay in the market?

    As one oil analyst said yesterday, maybe the tipping point for a reversal will be the removal of subsidies in Asian countries.

    One interesting question, if the oil price does subside where will the hot money go next? The USD? Somewhere else?

    Interesting also to see that Volcker endorsed Obama. I wonder if the USD becomes an election issue?

  2. Default

    MY POV is that there is too much capital chasing finite resources at the moment. Oil is the No 1 example; other substitutes such as gas are also on the run. Your previous post illustrates that not all commodities are acting alike though.

    There is no IRR for commodity prices. Price simply matches current demand to supply and in so doing produces a pricing signal that may also influences future levels of supply and demand.

    The only sustainable increase to commodity prices is notational � to reflect inflation.

    Substantial global monetary easing has taken place this year to stimulate declining demand yet the price trajectory of energy has increased. A widely accepted explanation to this is that a supply response to the price signal is limited because of the scarcity of oil and that demand is fairly inelastic. If this scenario is true then we can look forward to an inflation shock that will produce a new paradigm and a smaller, energy constrained global economy.

    I assign some merit to the scenario that we are facing a constrained growth future in the global economy, not just from oil but also from the environment in general. (Water, CO2, soil nutrition, biodiversity etc). But I see it happening on a longer timeframe.

    Can the recent price acceleration of oil be attributable to this scenario reaching a critical phase? My opinion is that it�s unlikely, It is more likely to be too much capital chasing a parasitic return.

    Price spikes by speculation may last during the window of bringing on new supplies but prices are likely to fall abruptly as unwinding of speculative positions and new supplies compete for a battered demand.

    You ask, �Where will the money go?� if oil comes off the boil. I hope it goes into �real� investment, ie the sort that have a time lag before they pay off whilst holes are drilled and infrastructure built etc. I think we are beyond the point where price speculation on the upside is delivering any benefit through price signals generating additional supply response. Momentum has taken over, there is too much emphasises on investing parasitically for price changes, funnelling capital away from real investments and at the same time demand is being killed.

    The short-term price action for oil in particular, just doesn�t look sustainable to me, though there may be merit in the longer-term trend due to environmental constraints. I suspect that those who are investing �right now� on the premise of the long-term trend may find that waiting could have suited their time frame better, but that is just my opinion.

  3. Default

    kate said: "One interesting question, if the oil price does subside where will the hot money go next? The USD? Somewhere else?"

    Cotton? It would be a perfect trifecta to hit life's necessities. People can't afford to buy food, energy and clothing.

  4. Default

    I agree with you about global growth slowing, about time too.

    It would be nice to think that money would pour into real investment but where there is greed and a culture to make money regardless of the future consequences you will have speculative "investment".

    OHK

    You might be right about cotton. Australian cotton growers are planting more wheat due to the high wheat prices and lower water allocation. The US may have to pay billions of dollars in trade sanctions for failing to scrap illegal subsidies paid to US cotton groweres(BBC)!

  5. Default

    I know there was another thread for this stuff, but it appears to have moved!

    Nevertheless Ody, in another thread, mentioned that commodities were sold down and that this might have some significance (or not?).

    Commodities are on a downer, and the moot point is if they can fall much lower. It's moot because some of the metals are now selling below cost of production.

    My view is that zinc could have the odd cent to fall, but will rise again once the present surplus of metal start to again get eaten into - perhaps in 3-4 months.

    Lead is unlikely to fall much further and, in reality, is poised for some solid gains. Warehouse stock levels of lead are being continually eroded, as it's typically a byproduct of zinc mining and many zinc mines are closing down or going into care and maintenance.

    Copper has the most downside potential as it's still trading above cost of production, and is making regular inventory gains.

    Aluminium inventories are nearing historical highs, despite smelting costs far exceeding LME prices. The inventory surplus will keep a lid on prices for a good while to come.

    Nickel is selling well below production costs, and is also suffering from cycle high inventories. Unlike the other metals, nickel's surplus is significantly a factor of substitution via nickel pig iron. That was the case when nickel prices were over $15-20k but is no longer the case. While there remains a lot of low content laterite ore to work through, it seems a silly process given that input costs (via coking coal in particular) are more than twice the sale price. That said, it is difficult seeing nickel get back to fair value in the near term. Perhaps nid-2009 will see some semblance of market balance.

    Finally, a comment on uranium. The spot market follies appear to be over and we are likely to see a resumption of the uptrend in months ahead.

 

 

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