Commodity rally may end as supply rises

Production and Markets

Commodities, heading for the first quarterly advance in a year, may struggle to repeat their gains in the next three months as supply expands and speculators sell.

Nickel may average 29% less in the third quarter than now, crude oil 16%, copper 14% and gasoline 10%, analyst estimates compiled by Bloomberg show. Hedge funds and speculators cut their bets on higher prices by 23% in the two weeks ended June 23, the first back-to-back drop since March, based on an index using U.S. Commodity Futures Trading Commission data. The World Bank said June 22 the global recession will be deeper than it expected three months ago.

“Commodities have gotten a little ahead of themselves,” said Walter “Bucky” Hellwig, who helps oversee US$30 billion at Morgan Asset Management in Birmingham, Alabama. “As long as there’s uncertainty about growth, that’s going to be headwind commodities won’t be able to overcome.”

Commodities rose 14% this quarter, led by nickel, oil and sugar, after three consecutive declines, according to the Reuters/Jefferies CRB Index of 19 raw materials. This year’s
55% advance in oil costs, combined with widening budget deficits, may cause another global slump, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis.

The World Bank forecast for this year’s economic contraction to be 2.9%, rather than the 1.7% decline previously anticipated, may curb sales just as producers expand output in anticipation that the worst is over.

Evraz Group SA, Russia’s second-biggest steelmaker, said June 22 it restarted a blast furnace and Trimet Aluminium AG, Germany’s largest maker of the metal, began raising output in May. China’s aluminum industry, the world’s biggest, is starting or reopening 2.1Mt of annual capacity, equal to about three weeks of demand, according to Barclays Capital.

Nickel output rose for two consecutive months through April to 109,400t, the most since December, according to the Lisbon-based International Nickel Study Group. Daily average aluminum production expanded in April and May, to 95,400t, the International Aluminium Institute in London reported.

Lead mines extracted more metal in March and April, taking monthly output to 300,000t, the most since December, the International Lead & Zinc Study Group said. Zinc mines increased production to 890,900t in April, also the most since December, the Lisbon-based group reported.

Lead, aluminum and tin stockpiles in warehouses monitored by the London Metal Exchange rose at least 87% this year.

“We expect commodity prices to come off in the short run, in the next two or three months,” Francisco Blanch, head of global commodity research at Merrill Lynch & Co., said in an interview from Sydney. “Oil and some of the metals markets will start to suffer because of large inventory accumulation.”

Copper will fall to US$4,354 a metric ton on the London Metal Exchange as nickel averages US$11,250/t, the forecasts show.

Billionaire hedge fund manager George Soros on June 20 told Polish television station TVN24 that the worst of the global financial crisis is over. The crisis, which started with the collapse of the U.S. subprime-mortgage market in 2007, has led to more than US$1.47 trillion of writedowns and credit losses at financial institutions, according to data compiled by Bloomberg.

The Organization for Economic Cooperation and Development in Paris raised its forecast for the economy of its 30 member nations for the first time in two years on June 24. The economy of the world’s most-industrialized countries will shrink 4.1% this year and grow 0.7% in 2010, the group said. That compares with March projections for contractions of 4.3% and 0.1%.

Hedge funds and other large speculators are holding a net
653,915 contracts betting on higher prices, according to an index of combined positions in 20 commodities tracked by the U.S. Commodity Futures Trading Commission. Their net long position reached 854,743 contracts earlier this month, from as few as 86,220 in December.   

“Some of the run-up was money that had been laying on the sidelines and poured into the market without looking at the fundamentals and that’s the froth that’s got to come out,” said Peter Sorrentino, who helps manage US$13.8 billion at Huntington Asset Management in Cincinnati. “We could see the commodities lose about a third of the gain they’ve had in this run up.”

The 82-company Bloomberg World Mining Index, which plunged 61% last year, rebounded 41% this year.

Deutsche Bank AG Chief Operating Officer Hermann-Josef Lamberti said on June 18 that the market is still in “the eye of the storm” as the credit crisis affects the economy.

“Commodities will likely tread sideways from now unless there is some substantial data of economic recovery,” said Pierre Montezin, a fund manager at Zurich-based Plenum Investments Ltd, which manages US$170 million. “In the short term, I’d position for a correction.”

 June 29 (Bloomberg)