When the world economy slid into recession in 2008 it marked the end of the commodities "super cycle" of sharply rising prices underpinned by the insatiable appetites of emerging giants such as China, India and Brazil. But recent months have seen a revival, with metals, oil and food prices rebounding strongly on signs of economic recovery and a return of growth.
Oil and Gas
The different trajectories of global oil and gas prices are a clear illustration of the scale of gravitational pull from the world's emerging economies. As growth has picked up over 2010, the Brent spot oil price has risen from around $74 to above $90. And even discounting the immediate effect of the winter weather – which shunted New York-traded futures to a 26-month high earlier this week – the trend is still firmly upwards, powered by the thirst of China and India in particular. There is still some flexibility on the supply side, because the 12-strong Opec producers' cartel (Organisation of Petroleum Exporting Countries) has not yet unwound the production restrictions put in place in 2008 to put a floor under the crashing price. But a growing number of analysts are already predicting the oil price will breach $100 once again in 2011.
Gas is quite different. The combination of technological advances opening up shale gas deposits in the US, and the ramping up of liquefied natural gas deliveries from the Middle East, has sent the US benchmark "Henry Hub" price down from an annual average of $8.90 per million British thermal units (mbtu) in 2008 to about $4.40/mbtu this year. And analysts expect it will fall still further next year before suppliers are convinced to cut capacity.
In part gas is different because it does not function as a global market. But it is also isolated from the growth boom in China and India, which look to coal and oil for their energy.
"The problem is that there is too much gas," Kevin Norrish, a managing director in the commodities research team at Barclays Capital, said. "While that can be obscured in peak season winter demand, particularly when it is abnormally cold, the underlying dynamic is one of too much supply."
If you're looking for evidence of the upswing in coal market, just look at the uptick in deals. The sector has seen more than 1,000 mergers and acquisitions announced over the past 12 months, a reflection, analysts say, of the expected tightness in the market. Prices are being driven by the combination of growing Asian demand – the continent accounts for nearly 70 per cent of global coal consumption – and the prospect of "massive deficits around the corner", as Standard Chartered puts it. The bank estimates the global deficit could swell to some 30 million tonnes by 2018, which is expected to put upward pressure on coal prices. In terms of costs, export prices at the Richards Bay Coal Terminal in South Africa, the largest coal export terminal in the world, rose to a two year high of around $128 a tonne last week. Though the recent spike was spurred by inclement weather and the temporary closure of mines in Australia, the long-term trend is positive. Standard Chartered expects world coal prices to rise to $200 a tonne by 2024 and to more than $240 a tonne by 2030.
Copper prices have enjoyed a heady rebound over the last year. Boosted by predictions of a widening market deficit in coming months and the prospect of further weakness in the US dollar, benchmark copper prices on the London Metal Exchange rose to more than $9,500 a tonne yesterday, within a whisker of the all-time high. Supply is expected to struggle to keep up with demand, with Goldman Sachs expecting nearly all exchange inventories to be exhausted over the course of 2011. Further out, Standard Chartered analysts expect the growing mismatch between supply and demand to drive prices to more than $15,000 a tonne by 2027.
The aluminium market is likely to prove more subdued, with Rusal, the world's top aluminium producer, seeing prices of up to $2,500 a tonne, only marginally above current levels. In the nickel market, Goldman sees the risk of a sizeable surplus as new projects are commission and consumption growth in emerging markets slows in the middle of next year. Longer term, however, prices should strengthen as emerging markets consumption increases.
Gold prices have enjoyed a strong run over 2010, rallying from around $1,100 an ounce at the beginning of the year to a record $1,431 in early December. The recent upswing can be traced back to late 2008, when wary investors, rattled by the demise of Lehman Brothers, fled to safety. Prices were underpinned by the subsequent slump in interest rates across the world's major economies and central bank moves to boost liquidity in the UK, across Europe and the US. Analysts expect the gains to persist in the New Year, but Goldman Sachs, which expects prices to vault to nearly $1,700 an ounce by the end of 2011, warns that may be the peak as US economic growth picks up and interest rates rise in 2012. Like gold, silver has also seen some heady gains, with spot prices touching a fresh 30-year peak of $30.70 an ounce yesterday, boosted by industrial demand and the knock-on effect of the rally in gold. Goldman Sachs analysts expect silver to drop back to nearer $28 an ounce by the end of next year.
Prices for so-called "softs", such as foodstuffs and cotton, have shot up this year. Wheat prices are up by 44 per cent this year, corn by 49 per cent, sugar by 17 per cent, soy beans by 31 per cent and cotton by a whopping 85 per cent.
At the start of 2010, the expectation was for a steady year. But that was before the La Niña weather cycle wreaked havoc across the globe. Floods in the US and Pakistan decimated corn and cotton production respectively earlier in the year, while flooding in the summer season in Australia is still affecting wheat and corn. Meanwhile, fires across Russia cut a swathe through wheat exports, and a continuing drought in Argentina is pulling down soybean and corn harvests.
In the background, as with so many other commodities, there is upward price pressure from rising incomes in the developing world. As diets in China become more meat-rich, for example, corn imports rise to feed the army of pigs.
Next year, as La Niña fades, soft commodities markets are expected to diverge. Some prices, such as cotton, are set to return to more normal levels, despite some increase in demand for cheap clothes from emerging economies. But others, particularly foodstuffs, such as soybeans and corn will continue to rise to feed the growing demands of a richer world.
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