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April 3, 2014 11:57 am
Commodity trading executives tend to speak bluntly. This week has been no exception. The oil sector is “stuck in a rut”, metal producers must get their “shops in order” and the agriculture industry is “on a knife edge”.
Those are some of the messages at the FT Commodities Global Summit in Lausanne. That may not sound especially positive, at least for trading houses, which can thrive on volatility. But, after a tough 2013, when prices of major commodities fell amid concerns about global financial health, the mood among delegates about the world economy was cautiously optimistic.
Indeed, concerns over slower Chinese growth were played down, as was the possible impact of Russia-Ukraine tensions on energy and grain supplies.
Juan Luciano, chief operating officer of Archer Daniels Midland, one of the world’s biggest agricultural trading houses, said: “We see the global economy accelerating in 2014 and 2015, driven mostly by the developed economies . . . [with] emerging markets broadly flat.”
Top traders’ insights are closely followed because they are responsible for moving the basic goods – from wheat to copper and oil – that keep economies ticking. Unlike producers, such as miners and petroleum companies, which benefit from the underlying commodity prices, traders make much of their money from correctly identifying the direction of markets and taking advantage of price differences.
Mr Luciano added that the US shale gas boom was igniting a “manufacturing renaissance” there. But the US’s increased energy production has been offset by supply disruptions in Libya and elsewhere. The price of Brent crude has remained stable, hovering between $100 and $110 a barrel, where it has been for much of the past three years.
“The market is a little bit stuck in a rut,” said Ian Taylor, chief executive of Vitol, the world’s biggest independent oil trader.
US natural gas futures were boosted in February by the unusually cold winter weather in the US, but have since fallen to $4.35 per million British thermal units, close to the price at the start the year. Marco Alvera, chief executive of Eni Trading & Shipping, said that if tensions over Ukraine caused Russia to cut gas flows to Europe, 30 per cent of supply would be lost. Yet European gas prices have fallen sharply over the past month, indicating that the market thinks the risk of disruption is low. Mr Alvera sees US gas prices staying below $5 indefinitely and thinks oil may drop by up to 20 per cent if and when the US starts exporting crude.
The flat energy prices contrast with those of agricultural commodities, which have risen sharply this year due to unfavourable weather and concerns over Ukraine, a major grain exporter. Paul Conway, vice-chairman of Cargill, the US agricultural trading house, said extreme weather events were becoming more common, raising price volatility and leaving “very little room for error” in the supply chain.
“We are still living on a knife edge,” he said. “With the increase in GDP, increase in consumption, also driven by meat, we need a good planting season, a good growing season and a good harvest season in the northern hemisphere and then a repeat in the southern hemisphere.”
China’s rapid expansion since 2000 fuelled the commodity price boom. But growth is slowing, in part due to rules aimed at cutting pollution and waste.
Marco Dunand, chief executive of Swiss-based Mercuria, which in March agreed to purchase JPMorgan’s physical commodities business, said the slowdown would bring more efficiency to China’s economy, and was being carefully managed. Yusuf Alireza, chief executive of Hong Kong-based Noble Group, said the Chinese government had the resources to ensure that growth remained above 7 per cent.
For industrial metals, the short term outlook remains gloomy, with prices still well below the pre-financial crisis highs. Asked for his views on copper, Mark Cutifani, chief executive of Anglo American, a major copper producer, was honest enough to say “short, in the short term”.
Ivan Glasenberg, chief executive of Glencore Xstrata, the UK-listed resources group, said: “We overproduced and are bearing the fruits of that today. We have to reduce our costs and get our shops in order. When supply works out of the system, we should be back to the good days of 2003 or 2004.”
Better times may not be that far away. Brett Olsher, co-head of global natural resources at Goldman Sachs, sees copper moving as high as $7,500 a tonne by 2016, from $6,635 today. Aluminium could rise by nearly 40 per cent, to $2,500 a tonne, in the next two to three years.
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