Fears over commodities upswing: Peter Torday reports growing concern over inflation as prices increase across the board

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The Independent Online
COMMODITY prices have shot up in the past few weeks. A subject that is usually of peculiar interest to a small band of professionals is now the concern of central bankers and small businesses alike.

From palm oil and tournesol seeds to nickel and aluminium, prices of almost every commodity have leapt upwards. Coffee, for instance, has almost doubled in price to dollars 2,167 dollars a tonne since early February. Oil prices have surged from around dollars 12.90 a barrel to a high last week of dollars 16.72.

And copper, once regarded as an advance indicator of global economic activity, has soared to dollars 2,216 a tonne from dollars 1,612 on 25 October. Despite assurances from the Bank of England there is understandable concern about the impact on inflation.

Experts say the upswing reflects a change in market sentiment, boosted by hopes that the global economy is picking up speed. This has coincided with supply problems in a number of markets.

But these trends are also being magnified by speculation. Investment funds and hedge funds, some of which were active in global bond and equity markets until the bear market set in after US interest rates rose in early February, have poured into commodity markets.

It is easy to see why. Lured by cheap borrowing, low prices and much larger profits than in stocks and bonds, they have piggybacked on the change in sentiment.

Philip Crowson, of RTZ, says: 'A significant sum of money is looking for an attractive rate of return. The big movement of investment funds into all the markets is bringing forward the price rises of 1994 and 1995.'

While that may be true, few commodity markets are behaving as if the party is over. And as long as such sentiment persists speculation will combine with positive sentiment to underpin prices, spurring them higher still. Though a global trend may be under way, each market is different.

But few British companies have so far worried about the upswing. A CBI spokeswoman said yesterday that at the latest meeting of industrialists looking at the economy there was no concern expressed on commodity prices, either in relation to their own circumstances or to the immediate inflation outlook. 'But there is concern about inflation next year,' she added.

Coffee - In 1989 the International Coffee Organisation's support pact broke down. Producers dumped surpluses on consuming countries and the price collapsed.

After unsuccessful attempts to stitch together a new accord crops in Central America started to fail because farmers could not afford to tend their crops. There was a sharp rundown in stocks which from last October began to boost the price. The gentle climb under way since then was recently transformed into a surge.

Nestle, which boosted prices 12.5 per cent in January, says it has no current plans to raise prices again, but adds: 'If the current situation continues for some months we would have no choice but to pass on the price rise.'

Cocoa - The story is similar but Lawrence Eagles, of GNI, a futures brokerage, says that most of the price of a chocolate bar reflects marketing costs. 'You could be looking at a doubling in cocoa prices, adding one penny to the price of a chocolate bar,' he says.

Oil - Until February oil prices had been falling since the autumn of 1992 when they averaged dollars 20.45 a barrel. After hitting a low of dollars 12.90 the price was pushed above above dollars 16 by the Yemeni civil war, Opec production cutbacks and a severe North American winter.

But this trend already looks short-lived. Yesterday oil prices slipped below dollars 16 a barrel because of surging North Sea output, increased US refining ahead of the summer and renewed expectations that Iraqi oil could soon start to flow on to world markets.

Copper - This market is being pulled up by strong US demand. It is a key commodity for car production and construction activity as well as electronics, and the cyclical upturn in the US has produced heavy demand, which is already being supplemented in Europe.

It is one of the few cases where the excess stock overhanging the market has shrunk sharply. So far this year physical copper stocks on the London Metal Exchange have fallen by 30 per cent.

Other base metals have been pulled up in sympathy with copper, even though special factors affect each market. Aluminium, for example, has run up from dollars 1,037 a tonne last November to around dollars 1,370, largely on a wing and a prayer that a loose production cutback accord between North America, Russia and the EU will work.

Nickel jumped by 50 per cent between September and January and later reached a recent high of dollars 6,590. It is helped by production problems in the former Soviet Union and the threat of a strike at the nickel producer Inco. But demand is higher, too. Demand for stainless steel, accounting for 60 per cent of all nickel use, is strong.

Precious metals - Silver has risen slightly in line with base metals and platinum has also jumped, partly because of production uncertainties before the South African elections. Gold, in contrast, boomed last year from just over dollars 300 an ounce to about dollars 410 by midsummer, falling back after that. It trades now at dollars 382.55.

But analysts are sceptical that current trends will continue unbroken or that there will be a repeat of the 1986-88 commodity price boom. Inflation will probably pick up a bit but not sharply. Hedging against price rises is universal. And new technology has curbed the importance of commodities per unit of production.

But over the longer term commodity prices may well spiral upwards. Mr Eagles says: 'We have seen the bottom of the commodity price cycle. There will be no boom until the end of the decade when strong demand from India and China will be a formidable factor.'

(Graphic omitted)

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