HEARD ON THE STREET
.
DECEMBER 26, 2011, 2:08 P.M. ET
.
New Year Tests for Faith of the Commodities Congregation
.
By ANDREW PEAPLE
Commodities face a test of faith in 2012. The tenets that have underpinned the asset class in recent years, strong growth in emerging countries allied to steady demand in the developed world, are under pressure from the euro-zone crisis and signs of a slowdown in China.
Investors are worried already: Hedge funds cut commodities exposure by 50% from May to December, Barclays Capital says, during which time the Dow Jones-UBS Commodity Index has fallen 19%. Some strong signals will be needed to lure back the faithful in 2012.
Europe's troubles don't only have an impact through the Continent's weaker demand for commodities. As European banks deleverage, they are pulling back on providing trading finance, the grease that keeps the commodities engine chugging along. Lower European demand for imports also means weaker export activity in countries like China, where manufacturing activity shows signs of contracting. Meanwhile, China's faltering property market—prices are falling in half its cities—could damp construction growth there and hence demand for metals.
The accumulating risks have already made a mark. Industrial metals have fallen 25% since late July; agricultural products are down 21% since late August. If the macro backdrop worsens, some commodities may have further to fall than others. Copper, for example, is still 85% above the cost of production for the industry's highest-cost producers, according to Barclays Capital. By contrast, the price of aluminum is 22% below the industry's marginal cost. That already is causing some producers to cut supply, meaning aluminum could be close to its price floor.
Similarly, any crude-oil price declines may be arrested by supply cuts in producing countries. Governments like those in Saudi Arabia and Russia need solid oil prices to balance their fiscal positions. The complicating factor will be internal divisions within the Organization of Petroleum Exporting Countries, with Saudi Arabia and Iran locked in a contest for regional supremacy and all members having to make way for rising Libyan and Iraqi oil output.
Among agricultural commodities, soybeans could benefit as more land is given over to corn production. Demand could exceed supply by 1.2%, J.P. Morgan forecasts, the first soybean deficit since 2009.
Unpredictable factors will continue to buffet individual commodities. A repeat of last winter's harsh weather could push grain, coal and iron-ore prices higher. Strikes at two of the world's largest copper mines helped support that metal in 2011. And oil will still move to the rhythms of geopolitics and threats of war.
But a more sustained rise for commodities will require a swift resolution of the euro-zone crisis and evidence that Beijing is managing a soft landing for the Chinese economy. Hopes of this fuel optimism for perennial commodities bulls. Goldman Sachs sees Brent crude closing 2012 at $127.50 a barrel, up 18%, and copper at $9,500 a metric ton, up 28%. Such high expectations may be the domain of the true believers for some time.
.
0 comments:
Publicar un comentario