By Staff Reporter
Short-term commodity demand growth will remain stronger than expected because of developments in Asia despite the economic slowdown in the United States, said Daniel Sacks, head of resources on the commodity investment team at Investec Asset Management.
He said while infrastructure spending will remain high, commodity prices would continue to move upwards.
“During the 1950s and 1960s, commodities enjoyed high average rates of demand growth and over the next 15 years, we expect to see a similar scenario,” said Sacks.
These, he said, are underpinned by three key factors: the first is that demand will be driven by the development of urbanisation of economies like China and India; the need to rebuild existing crumbling infrastructure in the Western world where poor economic performance and privatisation from the mid-1970s to the mid-1990s caused 20 years of underinvestment in that sector; and an increased investment in new infrastructure for alternative energy sources.
“Massive investment is also needed to conserve energy for environmental reasons,” he said.
For base metals, he said, flat or falling prices are predicted in the short term.
“At a time when rapid supply increases have been forecast, weaker demand growth from the developed world will spark concerns over large surpluses.
But for copper, lead, tin and aluminium, continued strong demand growth from the Middle East, China, and other Asian countries will fuel a recovery in prices before this year is out, as will delays to new supply and disruption to existing supply,” said Sacks.
The outlook for bulks, he said, remains robust as demand for steel and raw materials for steelmaking is dominated by China and the developing world.
De-stocking of steel in 2007 has left markets tight in North America and Europe. In iron ore and coking coal, spot prices are up to 100 percent higher than current contract prices, which are forecast to rise at least 50 percent for the beginning April 2008.
“[Energy] prices are now settling at high levels as robust demand is sustained, not least because of subsidised prices in many developing countries. Supply, though, continues to disappoint, with non non-OPEC countries failing to deliver.
“Thermal coal prices have also risen rapidly as rail and port bottlenecks in Australia have disrupted supplies, and demand for coal in China remains particularly strong.”
Gold continues to look strong with dollar weakness. For platinum, the key driver in the short term in supply, he continued, which is being squeezed in an already tight market by safety and cost issues in South Africa.
“Although car production is likely to decline in the Western world, this will be offset by growth in developing economies and higher emissions standards,” said Sacks.
Soft commodities, he said, set to remain firm as demand for bio-fuels remains strong.
“With agricultural land in short supply as a result, crop rotation will be high and prices volatile, but fertiliser demand is very strong and supply is constrained due to lack of investment in recent years,” Sacks said.