Commodity prices may sink deeper this year
By Staff -- Purchasing, 3/11/1999
World prices for metals, minerals, and other commodities will sink deeper this year after plunging in 1998, forecasts the World Bank. "Metals and minerals will drop from weak demand and increased production," says the bank's latest quarterly Global Commodity Markets Report."Weak demand, big supplies, and rising inventories" in 1998 beset most of the 27 major world commodities tracked by the World Bank. Looking at 1999, the report says "all major commodity groups are expected to have declining prices." Note that prices have already reached in the past two months their lowest levels since the late 1970s, according to the Bridge-Commodity Research Bureau's index of major world commodities.
Since advances in technology have made production cheaper, the Asian financial crisis only accelerated the drop in commodity prices. Recent economic turmoil in Russia and Brazil is likely to prolong weak prices, according to the bank. The collapse of Asian currencies, and now the threat of similar currency weakness in Latin America, could also push already-depressed base-metal prices lower.
Offshore producers, who earn in dollars while paying costs in local currencies, are increasing their use of futures and options to sell metals forward at current prices and rates of exchange. Known as hedging, this practice is locking in wider profit margins for this year's output and will keep metal supplies high and prices low in coming months.
In a separate report, Rudolf Wolff & Co. of London says already-depressed base metals may have yet to hit the bottom of their price cycles. "There is still room on the downside for metals prices" because substantial production cuts and a recovery in Asian and emerging markets "remain distant prospects," according to Wolff analyst Martin Squires.
The flagship London Metal Exchange three-month copper contract is at its lowest price in more than a decade, and LME copper stockpiles, the benchmark for global inventories, have reached their highest level since the LME began keeping records 30 years ago. Aluminum prices have not been so low since the early 1990s. Other less-traded contracts, including nickel, zinc, and lead, also are wallowing at multiyear lows.
"A booming U.S. economy is good for metals prices, but concern is rising that demand will begin to taper," Squires says. "The markets are still concerned that the U.S. bubble will burst and that the shaky Asian recovery will falter," he adds. "On top of this, the fear of a Latin American shakeout is being realized and China is beginning to worry us again."
"Beyond 1999," according to the World Bank report, "we expect commodity prices to begin to recover, but the recovery is expected to be slow and very much dependent upon growth in world economies." It may take "several years of rapid economic growth" such as the growth spurt in the mid-1990s, to erode commodity surpluses to the extent that prices can climb again.
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