August 14, 2009 6:44 pm
Buying into commodities of all sorts is in vogue due to the revival in crude oil, gasoline, sugar, coffee, copper and soybean prices.
In the first six months of the year, commodities were the best-performing asset class, as the Dow Jones UBS Commodities index rose 5 per cent against a 4 per cent decline in the FTSE 100.
Industrial metals led the resurgence, thanks largely to the return of large-scale building and demand from China. Gold, silver, platinum and palladium were also up. Agricultural commodities, however, have been mixed with prices of sugar, coffee and soybeans rising, while demand for grains have been hit by weakening wheat and corn prices.
But interest in the wider sector remains healthy. Inflation fears have ratcheted up commodities’ appeal as a better hedging device than index-linked bonds. The weakness of the US dollar is also enticing investors with sterling in their pockets as they can buy more with their money.
In the first half of the year, assets under management in the exchange-traded commodities (ETCs) managed by ETF Securities doubled to $12bn, from $5.6bn in November last year. Oil ETCs run by the company saw inflows of $1.4bn in the first six months with ETCs tracking longer-dated oil futures gaining considerable attention.
“Definitely, ETC investors are playing a larger role in this market than previously as these products did not exist before 2006,” says Jon Rigby, energy analyst at UBS. “But they remain a relatively small component of the overall crude oil market and their influence is certainly not dominant.”
Crude oil – the sector’s bellwether – began the year poorly, but managed to
pick up pace in February before jumping to its current price range of $68-$75 per barrel.
A pull-back is likely in the near term, but oil still attracts buy-and-hold investors as its price could well rise above $100 a barrel. Since the year’s start, Nymex September West Texas Intermediate is up 53.6 per cent at $70.80 a barrel while ICE September Brent gained 47 cents this week to hit $73.95 a barrel.
“All the problems we’ve talked about with supply haven’t gone away,” reports Tom Becket, director of Investment Strategy with PSigma Investment Management. “Major oil companies have cut back on capital expenditure and at some point we could see ‘supply-side shock’ and that could send prices materially higher.”
Gasoline has also made a comeback following a sharp sell-off last year which prompted prices to hit lows not seen in four years. In the first half of this year, by contrast, gas ETCs increased by 58 per cent and they are expected to rise still higher next year if crude oil prices jump. Natural gas, however, underperformed, losing 33 per cent in the first six months, but it is regarded as an interesting “laggard” play in the energy sector.
Base metals are marching higher as well, with copper gaining 103 per cent since January to reach $6,465 a tonne and aluminium climbing 29 per cent to $2,064 a tonne. T
Prices of nickel and zinc, meanwhile, have both benefited from the massive boost to China’s steel industry from the government’s stimulus package, which has led to many infrastructure projects being fast- tracked for completion.
In soft commodities, the picture is mixed. Poor weather has damped the output of sugar in Brazil and India, the world’s two largest producers, driving prices up into uncharted territory. The latest weather reports from India, the world’s largest sugar consumer, indicated continuing disappointment for this year’s monsoon with rainfall 56 per cent below average and falling for a third week in succession.
In Argentina, the sixth-largest wheat exporter, drought has resulted in the country registering its lowest yearly output for the crop since 1982. Wheat exports from the US are likely to drop by 20 to 30 per cent this year as well, while a drought across China has wiped out 40 per cent of its annual wheat production.
Another concern is that the credit crisis is still affecting supply as producers of soft commodities face difficulty obtaining letters of credit to ship goods. It is also not easy for suppliers to borrow funds to buy fertiliser, seeds and feed for livestock.
But shrinking supply is throwing up opportunity for short-term investors. This week, the sugar market, for example, extended its rally with ICE October raw sugar, the global benchmark, up 5.4 per cent to 23.28 cents a pound, the highest level since 1981. Orange juice futures prices also hit their highest levels for a year on Wednesday, after a 45 per cent rise in the past six weeks, amid concerns over Florida’s disease-hit citrus crop and signs that juice demand is improving.
Another favoured play is to add to holdings in emerging markets, as many of these countries are benefiting from the upswing in commodities prices. Since January, the FTSE All-World price index is up almost 19 per cent, according to Morningstar.
“Everyone is more optimistic about global growth and, as time goes on, the share of global demand will be more skewed in favour of emerging markets as the US and UK economies become less important,” says Jeremy Tigue, manager of the Foreign & Colonial Investment trust. He is maintaining an overweight position in emerging markets.
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