Global Prospective: Banks anticipate sharp decline in commodity prices

A deceleration in prices of commodities globally would ease prices for those products in Nepal. That would help ease double-digit inflation ravaging the country because commodities make up a significant portion of Nepal's CPI basket.

China's credit curbs pose mounting risk to commodities
Telegraph, 1-Apr-2010
By Ambrose Evans-Pritchard

The big global banks are quietly preparing for a slide in commodity prices over coming months as China clamps down on excess lending and the US Federal Reserve takes away the liquidity pot.

"We believe overheating risks in China are escalating," said Michael Lewis, commodities chief at Deutsche Bank. "Heading into the second quarter, we believe China will become the main source of event risk for commodity markets, specifically industrial metals."

Mr Lewis said Beijing is likely to slash growth in spending on infrastructure from 120pc last year to just 7pc this year. Deutsche expects China's central bank to cut loan quotas by almost a quarter to 7.5 trillion yuan ($1.1 trillion) this year, raise rates, and tighten reserve rules to choke inflation, while local authorities take their own measures to curb the property boom. Lead, zinc, copper, and nickel are all highly leveraged to China's building cycle.

The Royal Bank of Scotland echoed the concerns, saying China has kept the prices of raw materials buoyant by sucking in the world's supply. "A hefty proportion of these imports have undoubtedly been stockpiled, some by private speculators. We do not believe that much unreported stock has yet been eroded," said the bank's commodity team, Nick Moore and Stephen Briggs.

"Our central theme remains to be wary of a general price lapse for the commodity complex over the next six months – not a major price collapse, more of a hiatus. Then sunlit uplands beckon," they said. RBS said a surge of pent-up supply from mines is "waiting in the wings to make its grand entrance" just at the wrong moment as the global recovery goes through a patch of turbulence.

The family of energy, metals, and farm goods has already lagged equity prices since the start of the year. The Reuters/Jefferies CRB commodities index peaked in January and is threatening to slip below its 50-day moving average, a key technical level.

This may offer a better gauge of underlying monetary forces in the world economy than stock markets. The M3 money supply has been contracting since mid-2009 in both the US and the eurozone. It has been slowing in other areas such as Saudi Arabia, where the M3 growth rate has fallen for five months.

The faltering commodity rally has been disguised by the strength of oil, itself sui generis because OPEC can defend the price by cutting output. Crude flirted with $85 a barrel on Thursday, but may struggle if OECD stocks remain above average levels for long.

Sugar has crashed 47pc since its speculative peak in February, punctured by the effects of record planting and the waning weather effects of El Niño – now giving way to La Niña's dry winds over Brazil. Natural gas prices are down by a third. A surge in shale gas supply in Pennsylvania and Colorado unlocked by new technology has combined with a flood of liquefied natural exports from Qatar and Malaysia. Supply has met demand with a vengeance.

Wheat, corn, zinc, soybeans, uranium, and cocoa, are all down this year. But while every commodity has its own story, the sector as whole moves in rhythm with the global liquidity cycle. It is eagerly watched for clues, like the Baltic Dry Index for bulk shipping. The BDI has fallen by a third since November. The 90pc rise in iron ore contracts extracted last week by Rio, BHP Billiton, and Vale for the next quarter may soon look inflated.

RBS is most bearish on gold, forecasting a 17pc drop to $925 an ounce later this year. The metal will lose its 'anti-dollar' appeal as the dollar grinds higher and the Fed tightens, but shoot to fresh records above $1,300 by 2013.

The bank sees parallels with the commodity rally of 1982, which faltered after nine months as the US economy tipped into a double-dip recession. Raw material prices then relapsed for another couple of years. "We expect the path ahead to be strewn with many risks associated with unwinding strategies, rising rates and taxes, and the debt burden," it said.

Of course, China was a marginal force at the time. It consumed 5pc of global metal supply, compared to 40pc today. Paul Volcker was Fed chairman, executing a ferocious monetary squeeze. Ben Bernanke is a different animal.

Deutsche Bank is looking back further, eyeing the choppy action on Wall Street in the mid-1930s when sharp swings in confidence led to deep corrections. The ups and downs of the US stock market over the last year have mimicked the action between March 1933 and February 1934. The curiosity is whether this pattern – perhaps coincidental – will continue to hold. Wall Street fell 22pc the late Spring and early summer of 1934.

Deutsche Bank lists plenty of risks, not least a Greek default that spreads contagion, a larger bond market crisis in big industrial states, and regulatory overkill on banks. But the greatest looming danger is a Sino-American showdown over the yuan.

"Political rigidities appear to be building both within China to resist change, and within China's trading partners -prominently the US – to try to force change. This is a toxic mix."