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The welcome correction in commodities prices

The welcome correction in commodities prices

The Thomson Reuters/Jefferies Index, the most widely recognised measure of global commodities markets, dropped 8 per cent in 2012, and is down 14 per cent year on year.

The index hit a high of 350 in May of 2011 and is now hovering around 289.

Petroleum-based products, which comprise 33 per cent of the index, have contributed to the steep fall in the index.

After touching US$110.88 a barrel in February, the price of NYMEX Crude Oil is currently about $9O.5 per barrel, 18 per cent below the year high.

Gold, which topped $1,918 an ounce in September, 2011, is now trading 18 per cent less at $1,555 an ounce.

The falls in silver and copper are more pronounced, silver down 27 per cent from its 52 week high, copper decreasing by 23 per cent.

The key drivers in moderation of commodity prices are slowing growth in China, the rapidly deteriorating situation in Europe, the resurrecting strength of the US dollar, the lack of further stimulus programs, and the avoidance of higher risk assets.

The main beneficiaries are the US 10 year Treasury note which reached an all-time low yield of 1.702 per cent on May 16 and the US Dollar.

The dollar index is now trading at 81, close to its 52 week high of 81.78.

The natural resource and agriculturally rich Australian economy has suffered. Its currency has weakened below parity with the US dollar, trading at .975 from an all time high of 1.1079 in August, 2011.

Brazil, the world’s largest exporter of iron ore has seen a currency depreciation of 34 per cent versus the dollar.

China, the world’s second-largest economy after the United States, has fueled the secular commodities bull market of the last decade.

With a population of over 1.3 billion people the country consumes vast amounts of resources and is the fastest-growing major economy in the world.

China is the world’s second-largest importer, the top importer of coal, the second largest importer of oil and copper.

The economy grew at 8.1 per cent in the first quarter, its weakest pace in nearly three years.

This was the fifth successive quarter of slowing annual growth placing the economy on track for its weakest full year of expansion in a decade.

The government is attempting to reverse a surge in home prices, placing curbs on the property market by requiring high down payments and enacting restrictions on mortgage interest rates and housing purchases.

As a result home sales fell 25 per cent in the first two months of 2012.

The double whammy of a downturn in the property market and the government’s policy of reducing capital spending, negatively impacting investment in roads and infrastructure by up to 25 per cent, does not bode well for improving commodity prices in the second half.

Commodities are substantially priced in dollars, the stronger the dollar, the more expensive the commodity, and thus an increased deterrent to buying.

Historically there has been an inverse relationship between the value of the US Dollar and the price of commodities.

The increased prospects of a breakdown in the Euro and the zone’s economies, continued economic growth in the US, and most of the developed world’s economies stagnant or worse, continued strengthening of the US dollar remains likely.

The downward trend in commodity prices is welcome news to consumers, especially as gasoline and food prices decrease.

Lower raw-material costs will spur corporate spending and profit margins.

With most of the world’s economies in poor shape, the correction couldn’t have come at a better time.

Anthony Galliano is chief executive of Cambodian Investment Management.
[email protected]

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