SLOWDOWN IN COMMODITIES

Are we seeing the beginning of the end of the great commodity run? I feel that, though it is premature to write off commodities, they are certainly headed for a major fall. The reasons are not far to see;

A slowdown in the global economy is imminent. We are already seeing the signs in America and Europe. A demand drop poses a major threat to commodity prices, since demand has been a major driver of growth. The Chinese have contributed to the demand by their massive infrastructure build up for the Olympics. This is compounded by the fact that China has put on temporary freeze, all polluting industries like metals, chemicals, plastics. A significant cool off in demand is expected as the preparations for the Olympics near completion, coupled by increase in supplies once Chinese industries resume production.

The demand destruction could result in a major fall in commodity prices. Already crude oil has fallen about 18 % from its highs. A similar trend is seen in some non Ferrous metals, data for which is given below:

The data below gives the Commodity, Price on 2nd Jan 08, Year High and Price on 26th July,08.

Aluminium 2365 3291 2936
Copper 6665 9000 8258
Lead 2579 3459 2180
Nickel 26500 33250 19005
Zinc 2383 2825 1891
All prices are on London Metal Exchange, in US $ and per tonne.

Steel and plastics are still going strong and prices are buoyant in these items.
If commodities correct even moderately from current levels, it augurs well for Indian stocks, because we have witnessed a strong sales growth for the companies who have come out with results till now. Margins are under some pressure due to rise in input costs. If commodity prices come down, it could bring some cheer to the bottom lines of companies.