The tumble in oil prices since July has led to a broad sell-off in commodities. Of the 21 commodities tracked by the Deutsche Bank, only four, including sugar and timber, have shown positive returns so far in the second half of this year. The others have posted losses ranging from 5 per cent to as high as 40 per cent.
According to the Reuters-Jefferies CRB Index, a global benchmark for commodities, the prices have hit a six-and-a-half month low. In the wake of the price tumble, the debate is, should commodities, which has seen a boom lasting nearly seven years, be finally shunned by investors?
Some commodity-linked exchange traded funds are seeing large fund outflows of late as many investors have come to think that now is the time to cash out. Some, however, disagree. For instance, Barclays Capital maintains that of all assets, commodities are still the best performing ones, year to date. Certainly, now is not the time to move funds to either real estate or equities.
Though on the defensive, thanks to the all-round gloom, commodity champions nevertheless say the over 30 per cent fall in oil prices since they hit the record in July should not lull us into thinking that energy will stay cheap in the long run. What must not be lost sight of is that most of the world’s cheap reserves are already being tapped. However disagreeable it may be, we must be ready to pay for the soaring cost of exploration and development of new sources of oil.
As placing a bet on oil would not be wise, there is no let up in the search of alternative energies. It is not a concern, however, that the marginal cost of some of these energies is more than oil, even at its record levels. Goldman Sachs is not alone in forecasting that oil will cost $200 a barrel in the next few years.
Talking about a broad sell-off, we have seen how all base metals are moving lower, with oil. Steel producers are smarting under record price revisions of raw materials. They are meeting with consumer resistance as they justifiably seek price revisions. Besides the oil price behaviour, what has impacted the metal sector is the traditional summer slowdown in the West and also, China reining in industrial activity to host the Olympics.
Aluminium was giving robust returns not very long ago. In mid-July, aluminium cash price on the London Metal Exchange (LME) ruled above $3,300 a tonne, but this has come crashing down to $2,482 a tonne as the world economic outlook looks grimmer by the day and the LME stocks remain at a distressingly high level of 1.33 million tonnes.
There is no doubt that power shortages that many aluminium smelters in China, South Africa and the US face will normally create supply tightness. But as the US and Europe are not seeing any growth, power-related supply shortages are not going to give a leg up to aluminium prices.
MB Research says the “aluminium outlook over the coming months is for further price weakness. Generally, it would take a further significant supply disruption or a marked run-up in oil prices” for this near-term view to change.
