Commodities the new battleground

Commodity prices are the latest battleground for the forces of economic growth and stagnation. Prices rose strongly over the past year as one after another the leading world economies recorded faster growth rates than expected. By the end of 1994

the main Organisation for Economic Co-operation and Development economies had probably grown by an average 2.75 per cent, compared with a forecast of 2 per cent 12 months ago, and commodity prices had risen by about 35 per cent, with base metals leading the way.

Metal prices paused for breath last month, and copper prices last weekend were 6 per cent below the January peak.

But the US unemployment figures last Friday sent the first real warnings that economic growth in the world's leading economy might already have begun to slow down in response to increases in interest rates over the past 12 months. Commodity funds and speculators decided it was time to take some profits and metal prices fell a further 2-3 per cent on Monday.

Metal prices were weak again yesterday although other commodities saw bargain-hunting.

If the low American job creation figures for January turn out to be the result of poor seasonal adjustment, the slowdown in world demand for commodities could be some way off, and prices could recover.

But if the bears are right raw material prices could now be anticipating the eventual slowdown in demand instead of the traditional pattern where commodities follow the real economy at a distance of six months, the change being explained by the increasing use of the futures markets.

Certainly confidence in commodities has been shaken. Leo Doyle of Kleinwort Benson Securities argued last week that worldwide economic growth forecasts for 1995 are set to be revised upwards again and the OECD average growth would have to come down sharply to 2.5 per cent in order to hold down commodity prices.

He now believes much more economic growth was already in the price and OECD economic growth will have to exceed 3.5 per cent to sustain another rise in commodity prices.

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