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COVER STORY • COMMODITIES


levels. Te WTO has cut its estimate for 2012 trade growth to 2.5%, down from an expected 3.7%. Knock-on industries depen- dent on trade will also face weaker business, with the already sluggish shipping industry chief among them. Some economists, including Pettis of Peking University, pre-


dict a reordering of global economies. Global growth darlings including Australia, Brazil, Indonesia and Chile will no longer outperform, while the price decrease will be “like a huge tax cut for the commodity-importing countries” such as the US and Mexico, Pettis told China Economic Review. “He who is first shall be last, and he who is last shall be first.” Jayant Menon, lead economist at the Asian Development


Bank, argues for a more moderate view. Menon predicts that countries like Australia and Brazil will fall back on well-devel- oped service sectors and on agriculture as food commodity prices continue to rise. With the US and European economies shaky, money will still flow into Australia and Brazil in search of high yields and low risk. However, GDP growth, living standards and currency valu-


ation will nevertheless fall in tandem with exports, Menon said. “Tere’s just been a party with them, if you like, with champagne flowing over the brim. Tat will all go away.”


Consumption or bust


In the longer term, analysts have drastically different views on China’s growth and expected demand for commodities. Invest- ment bank economists generally predict that China's GDP growth will bottom out in the fourth quarter or early next year and hold steady at around 7% – perhaps the best-case scenario miners can hope for. Guo at CASS expects growth to stabilize at a more moderate 5-6%. Pettis, among the most bearish observ- ers, predicts that growth will average 3-4% or lower during the next decade. Pettis' prediction rests on the assumption that Chinese


Market value of steel and copper, 2003-2012 CRU Steel Index


CRU Steel Index


October 27, 2008 – The US announces negative GDP growth, indicating the start of the US recession


300 250 200 150


April 15, 2011 – China announces its first quarter of slower growth, signaling the start of the current downturn


Copper prices


Early 2006 – US housing prices peak and the bubble starts to implode. Investors put money into commodi- ties, seen as a safe bet


50 0 100


Bet the spend: Investing in metals is getting trickier


Commodities used to get no respect. A decade ago, trading in commodities were seen as being risky and obscure, an asset class best left to those with intimate technical knowledge of the market, writes Dambisa Moyo, an economist and former investment banker, in her book “Winner Take All: China's Race for Resources and What It Means for Us.” That era ended when hedge fund manager Jim Rogers


argued in his 2004 book that the asset class deserved both respect and investment. “Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market” triggered a 60-fold increase in investment from 2000 to 2011. These newcomers mostly speculated on the trend of con-


tinued growth, a relatively safe assumption in the last decade as Chinese demand skyrocketed. But going forward, investors may be better off leaving metals to the true commodity wonks. Analysts say the market will likely revert to an era where


betting on across-the-board price trends is a losing strategy, and only commodity experts trading on the smaller minutiae of the industry see consistent gains. Winning investments are likely to be made by trading on short-term ups and downs related to inventory changes, supply and demand shifts for individual metals or even weather patterns.


Trending topic But even leading commodity experts disagree on the particu- lars of the market. In the short term, a major debate among analysts is how much of an effect China's stimulus measures will have on commodities prices. China’s central government has approved US$111.5 billion in railway spending this year to bolster the economy, in addition to local government plans to spend at least US$600 billion. Ian Roper, a commodity strategist at CLSA, said the stim-


ulus will bring little unexpected spending, and that previously planned projects are just being sped up. “[Beijing officials] are getting more like Western politicians, just re-announcing policy.” However, Mike Elliott, head of metals and mining at accountancy Ernst & Young, said that the announced infra- structure spending could increase metals demand soon if the central government executes on its plans quickly, as it is known to do. For example, the government has announced US$8 billion in railway spending and approved 25 railway proj- ects in recent months, which would increase steel demand. In the meantime, the announcements themselves have


lifted metals markets, said John Mothersole, senior econo- mist at consultancy IHS Global Insight. But prices will fall if data begins to show that the stimulus is not having its intended effect, and many analysts doubt that governments will follow through on these ambitious plans. “In some sense, this is a classic [case of] buy on rumor, sell on fact.” Deciphering the impact of stimulus spending will be dif-


ficult. The easy gains of the last decade that earned commodi- ties respect are giving way to increasingly uncertain returns. As the market shifts, investors may continue to respect com- modities – but they don’t have to like them.


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2007


2008


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2012


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