Prices are correcting fast, but Barclays Capital is still positive on commodities. Paul Horsnell, MD & head of commodities research, tells Rajesh Bhayani and Dilip Kumar Jha that investors all over the world will have to learn to manage risks.
Do you think the bullish phase for commodities is over?
Prices are correcting, but the overall trend will remain positive for commodities as an investment class. Within commodities, success stories like bio-fuels are fading due to opposition against bio-fuels. Fundamentals will drive the market now. I suppose we will have to learn to live with volatility in prices while managing commodity risks.
Given that crude oil prices will remain high, don’t you think bio-fuels will drive the relevant agri-commodities?
There is a lot of opposition against bio-fuels. Environmentalists are lobbying specially against use of palm oil. As the general public opinion and policy reactions are turning against use of agri-crops for making bio-fuels, we are far more guarded now.
Do you think gold will again regain its status of a reserve currency due to the turmoil in the financial services sector?
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The central banks, which have signed the agreement to reduce gold as part of their reserves, have not changed their view yet, but it is possible they may slow down the sale of gold from their reserves. However, Asian central banks may consider holding gold as part of the reserves. It’s an open question whether gold plays a role in forex management.
There are other reasons for determining the movement of gold as well. The US dollar weakness is an important call that investors in gold will have to take.
In the recent past, a lot of investments have been made in gold, which is regarded as safe, but the $1000-plus price levels a few months back may not be seen in the short run.
We expect the average gold price to remain $890 in 2008 and $840 next year.
Within precious metals segment, what’s looking better?
Platinum is certainly looking better. Next year, we expect average platinum prices to go up to around $1900. This is because demand may soften and supply may fall faster than demand.
We are not very bullish on silver. This year, silver prices have gone up sharply, but the year may end with an average price of $16. It could be even lower at $14 next year.
What’s India’s role in global commodities?
India is an important player. Apart from being the largest consumer of gold, it is also the third largest crude oil consumer in the region. The important factor is India’s crude oil refining capacities have grown. The country is also one of the biggest producers of cotton.
China reduced production of metals and chemicals due to Olympics. Now that the Olympics is over, do you think China will start producing more?
That’s the answer all of us are trying to get. Our team is visiting various places in China to find that out, but we think demand is softening. On metals, we are bearish on zinc. Copper is holding reasonably well and we are positive on lead and nickel.
Wheat prices rose sharply last year. What’s the outlook now?
Last year was exceptional due to low (production of the) crop. But that is a distant memory. Wheat prices are far off from the peak of $13 per bushel last year. The current year is expected to end with an average price of a little less than $8.