Commodity prices to continue rising throughout 2010, but at a slower rate - BarCap

Continued growth in China and the further financialization of the commodity sector, along with growing supply constraints should mean a continued run for commodity prices

GRONINGEN - 

Fueled by China and the financialisation of the sector, commodities are likely to continue to rise this year and into 2011.

This is the view of, Kevin Norrish, MD of commodities research at Barclays Capital, who spoke to Mineweb from the Africa Mining Indaba 2010.

Norrish admits that there is a fair amount of uncertainty over where the world is heading, especially in the second half of the year when central banks are likely to begin raising interest rates.

But, he adds, "There is no question that if you look in very broad terms at the demand for commodities per unit of global GDP it is much higher than it once was.

"So, even if these very strong recovery growth rates begin to moderate you are still going to see strong demand for commodities both from China and from the industrialized world - in China you will see a continuation of the infrastructure development that has been running for a while, while in the US and Europe, a lot of the stimulus packages will continue to be spent.

Asked about the potential for a double dip scenario and the impact such a return to recession would have on commodity markets, Norrish says, he is not of the opinion that we will see such a scenario play out but, adds that it is also important to bear in mind that demand for commodities in emerging markets has really reached critical mass, particularly in China.

He adds, "China now accounts for between 30 and 40% of global copper, somewhere around 25% of global soy beans and more than 10% of global oil demand. In that sense you can argue commodities have decoupled from the OECD business cycle."

So, what about the recent moves seen out of China that is looking to curb its lending rates and tighten its monetary ship?

Norrish says, "That's something the market is very focused on at the moment. Clearly he Chinese government is trying to reign in liquidity and ensure lending doesn't get completely out of control. To me that is a sign that the economy is growing very quickly. And if one examines the forward-looking business indicators, the signs are that the Chinese economy has been much stronger than the government, or any onelse expected it to be. So I think what you are seeing now are some sensible fairly prudent measures just to trim that growth back to make sure things don't get too over heated.

"It's very clear the underlying demand picture in China is very strong and I don't think that is going to be derailed very quickly. Yes there may be some issues around liquidity but the picture is a pretty sound one," he says.

He adds, that the Chinese government's recent statements about its plans to raise living standards in rural areas should reinforce this picture. But cautions that the issue of inflation needs to be watched very carefully, "how quickly it appreciates and the pressure that could place on the government."

While emerging market growth, particularly out of China, is the main reason for the demand side strength Norrish expects, he says, the financialsation of commodity markets is also a factor and one that is likely to carry on.

"We spend around 90% of our time looking at the fundamentals of these markets because they are what ultimately determine price movements over the long term. But, it is very clear that commodity markets are in a phase where they are becoming financialized.

"Last year we saw an all time high in terms of investment inflows in to commodities somewhere around $70 billion by institutions, retail investors, sovereign wealth funds etc, and there are more and more ways to gain access to direct quality exposure to commodities.

And, "If you look at the total commodity assets under management at the end of 2009 it was around $250 billion; that sounds a lot but, in relation to the size of the total amount out there to be invested its minute proportion and there is clearly room for this to grow."

Where to from here?

Norrish says that for the reasons described, the demand side of the market looks rather good going forward and it is likely that by 2011 some of the supply constraints that had faded somewhat when demand took a big hit at the start of the recession will start to come back.

"I think in oil we have some spare capacity at the moment but it won't be too long before that is eroded and if you look at the potential for growth in the supply of a number of industrial metals, copper for example, there are not a lot of big projects coming through out there and of course we know there are a lot of issues in agricultural markets as well.

"To me this is a year where we will see markets improve a little bit further but not as great a price appreciation as we saw in 2009. For industrial metals the next leg is the feed through from the improvement in business sentiment so we expect to see some pretty strong demand coming through for industrial metals and that would mean we get significantly higher prices in the first half of the year although these are likely to decline somewhat in the second half as we start to get interest rate hikes from the likes of China and the US."

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