Fresh surge in commodity prices raises fears of unsustainable speculative bubble

Fears of an unsustainable bubble in commodity prices were fuelled yesterday after key industrial metals such as copper and zinc surged amid thin trading.

The copper price leapt more than 3 per cent in London as traders returning from the Bank Holiday rushed to catch up with a strong increase in New York on Monday.

It jumped by $235, or 3.4 per cent, to $7,235 a tonne compared with Friday's close. Zinc rose $135, or 4.3 per cent, to $3,310 a ton, within sight of the record of $3,445 hit last month.

The increases were scored against very thin trading in the absence of buying from China and Japan, the major consuming nations that begin week-long holidays this week.

"If the natural buyers go away you would expect the market to come off a bit but it's not happening - it shows you that it's a financial market, not a market between physical sellers and physical buyers," one fund manager said.

The International Wrought Copper Council (IWCC), a trade association for copper users, has written to the Financial Services Authority and the London Metal Exchange (LME) warning about the increasing role of speculators.

Simon Payton, its secretary general, said the price had been driven up by a "feeding frenzy" by hedge funds. "It may be great for the producers but we feel that a market built on speculation leaves tremendous problems for out side of the industry," he said.

"The margins on metal is straightforward, so at $3,000 a tonne, it is just about bearable but $7,500 a tonne raises serious issues."

The LME refused to discuss either its conversation with the IWCC or the reasons for the rise in prices. A spokesman said: "The market is operated in an orderly and transparent fashion and we have mechanisms in place to make sure that that is the case."

The copper market is prone to speculation as it is essentially a fast-moving financial market placed on top of a physical market with considerable lags between the mine and the open market.

Last winter, copper prices surged to a then-sedate $4,115 a tonne on rumours that a Chinese state copper trader had taken out a huge bet that prices were set to fall - and then went missing when prices soared 30 per cent.

However, analysts believe commodities are being driven by fundamental factors. On the one hand, supply is being held back by a number of constraints. On the other, the meteoric growth in countries such as China, India, Brazil and Russia - the foursome dubbed the BRICs by Goldman Sachs - is driving demand.

As Barclays Capital said in its recent forecast update: "Very few natural resource companies possess either the opportunities or capabilities to swiftly raise their output to keep abreast of the sustained move up in demand growth."

A survey by Barclays of 200 of its investor clients, including banks, pension funds, mutual funds and hedge funds, showed a massive shift into commodities. While more than two-thirds had no position in commodities at the end of 2004, the same proportion forecast that they would hold at least 6 per cent of the portfolio in these physical assets.

Whether this is speculation or sensible investment is open to debate but the figures appear to show that even conventional investors have woken up to the fundamental forces driving the price.

With the US equity market posting a 6 per cent gain in 2005 and US bonds rising 7.8 per cent, according to ABN Amro, committed commodity investors look wise.

There was fresh evidence of strong demand for copper on Monday from figures showing that US spending on construction rose twice as much as forecast in March, and a snapshot survey of the industry showed hefty expansion in April.

The metal is used in infrastructure projects for electrical wiring and piping. Copper also goes into a wide range of manufactured export goods such as fridges, computers and mobile phones.

Copper had gained 59 per cent this year and zinc, used as an anti-corrosive coating in galvanised steel production, had jumped 66 per cent.

Even the gold price, which hovered below the record of $661 an ounce set last week, is being driven by fundamental factors, analysts said.

Ross Norman, a director of thebulliondesk.com, said: "There is always a danger in saying that 'things are different this time' but there are some fairly compelling reasons that we are seeing a once-in-a-century, or perhaps even longer, rise in demand for resources - perhaps since the Industrial Revolution."

He said that while issues such as rising inflation and geopolitical tensions had helped push up prices, it was easy to overlook the mismatch between supply and demand.

Production in South Africa is at its lowest since 1924, development of new mines is being slowed by new social regulations while Latin American governments are turning increasingly nationalistic towards their natural resources.

On the demand side, there are signs that investment and pension funds are looking to increase their positions. At the same time, demand has been spurred by the creation of exchange traded funds that allow investors to buy almost directly into gold. On top of that, the creation of exchanges in places such as India and Dubai has increased the ease of investing.

Mr Norman said the ratio of the oil price per barrel to the gold price per ounce - traditionally between 13 to 15 - showed that gold could be worth $950 an ounce.

"Gold has underperformed relative to other commodities and is playing catch-up," he said. "There are lot of people looking to get in at the bottom whenever it falls, which shows the character of the market."

The role of speculators has also been a matter of heated debate between consumers and producers in the oil market. Crude prices have surged seven-fold, from below $10 a barrel during the 1998 Asia crisis to almost $75 a barrel in recent days.

Western countries have blamed Opec, the producers' cartel, for withholding supply and being opaque about the volume of reserves and production. In return, Opec states have blamed the high and volatile oil price on hedge funds.

Strong global growth, especially in China, has led to a surge in demand for the "black gold". Meanwhile, the slump in prices at the end of the last century provided little incentive for the investment in exploration and refining, creating supply problems now.

On top of this, growing tension between the UN Security Council and Iran over the regional superpower's nuclear ambitions and mounting civil unrest in Nigeria has raised concerns over supply disruptions.

Mohammad Hadi Nejad-Hosseinian, Iran's deputy oil minister, raised the temperature further yesterday, saying there was "some possibility" of a US attack on his country. He said prices could hit $100 a barrel by the winter.

US oil rose 50 cents to $74.20 a barrel, while London Brent crude gained 21 cents to $74.10 yesterday.

Don't blame us for what is happening, say hedge funds

The hedge fund industry looked to pour cold water yesterday over a growing chorus of malcontents blaming it for the "super spike" in the price of commodities.

A letter from the International Wrought Copper Council to the Financial Services Authority and the London Metal Exchange claimed speculators were driving prices to levels that no longer reflect supply and demand.

The trade body echoed the sentiment of Lord Browne of Madingley, the chief executive of BP, who last week decried hedge funds and speculators as the engine driving soaring oil prices.

He said: "The increase in prices has not been driven by the fundamentals of supply and demand. It is the case that the price of oil has gone up while nothing has changed physically."

BP's head of supply and trading, Vivienne Cox, said trading in oil commodities by hedge funds had increased tenfold over the past five years. Certainly, the hedge fund industry is booming and managers are increasingly active in commodity markets, which have proved extraordinarily profitable for a handful of funds, both here and in America.

In recent months, the UK funds Armajaro Holdings, Winton Capital and Red Kite Management were among those to have done nicely from winning bets on copper alone.

But the hedge fund industry insisted that commodity prices were being driven by a range of factors - an increasing diversification into alternative assets by the traditional big investors; the voracious appetite for raw materials from China, Japan and India; low stockpiles; disruptions to production - and not simply speculation.

Fred Demler, who manages the base metals desk for Man Financial, said: "Fundamentals are driving prices. There's a view that we are in a commodities 'super cycle'. Sure, the hedge fund community has grown, but 95 per cent of hedge funds have no exposure to commodities."

Commodity markets were too big and too liquid to be cornered by any single class of investor, hedge fund managers said.

Gary Parkinson

PROMOTED VIDEO
Extras
indybest
Travel
Flocking round: Beyoncé, Madame Tussauds' latest waxwork, looking fierce in the park
travelIn a digital age when we have more access than ever to the stars, why are waxworks still pulling in crowds?
Arts and Entertainment
tv
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Sport
Is this how Mario Balotelli will cruise into Liverpool?
football
News
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
i100
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Poet’s corner: Philip Larkin at the venetian window of his home in 1958
booksOr caring, playful man who lived for others? A new book has the answer
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
art
News
Matthew McConaughey and his son Levi at the game between the Boston Red Sox and the Houston Astros at Fenway Park on August 17, 2014 in Boston, Massachusetts.
advertisingOscar-winner’s Lincoln deal is latest in a lucrative ad production line
Life and Style
Pick of the bunch: Sudi Pigott puts together roasted tomatoes with peppers, aubergines and Labneh cheese for a tomato-inspired vegetarian main dish
food + drink
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
film
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Quant Analyst - C++, Boost, Data Mining

£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Service Desk Analyst- (Desktop Support, Help desk)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Junior Quant Analyst (Machine Learning, SQL, Brokerage)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

UNIX Application Support Analyst- Support, UNIX, London

£45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

Mackay, Moody and another grim day for English football

The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
La Liga analysis: Will Barcelona's hopes go out of the window?

Will Barcelona's hopes go out of the window?

Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape