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Commodity Outlook Dec 2008

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Barry Dawes, Managing Director of Martin Place Securities, talks about the investing in the Commodities sector, the current situation and the future outlook. The commodity outlook going into 2009 is difficult to read, weve seen unprecedented falls in commodity prices over the last four or five months as weve seen this deleverage action taking place primarily from hedge funds and others the fall in prices of copper, lead, aluminium, nickel, zinc, have been really quite remarkable and weve not seen this sort of thing happen before where we can go from such strong demand to such weak demand. Now its suggests a number of things, one that the inventory adjustment through the end user cycles is being run down, everyones basically stopped, consumption has fallen, but demand has fallen even more, so inventories are being wound down right throughout the pipeline. Now if the interest rates, and maybe some inflationary issues and the US dollar changes, if thats going to make the consumer change his view or the stockists change their views, we could see a fairly significant rally in all the metals, theyre over sold, theyve done things that Ive never seen in 30 years of watching markets and I think that theres a reasonable possibility for quite a strong bounce. The other thing we need to keep in mind is the gold price. We watch this very, very, closely. The gold price does appear to have been suppressed over the last several years and without doubt the actions in the market since the highs of over $1000 back in March 2008, certainly suggest that there have been actions to suppress the gold price. I expect that the short positions in gold will really come to the fore. I think gold prices will be quite strong going through the next couple of years, and thats going to impact on all commodities and will have a big impact on the way the Australian share market works. One of the things that Ive noticed over the past four or five cycles is that the gold price has a very, very big bearing on the willingness of people to come into the stock market, particularly in the resource sector. So lets watch that. One of the things that has been remarkable with the high oil price and high gold price that we had during 2008, the stocks for the gold producers, the gold explorers and developers, and the oils producers and explorers, were moving in different directions. The stocks were moving down while the commodity prices were moving up. This is really quite unusual, I expect that to turn as we go into 2009 and well find both oil price for supply reasons and keep in mind the supply of oil is going to be a critical issue for the next couple of decades. And short term I think we will probably see oil prices have a bounce and I think the oil stocks will participate in that. Now with the gold price moving higher, and suggestions of it moving much higher, I think were going to find that the changes and the accumulation under way in the gold sector will continue to improve. So theyre going to be the key drivers When we look at the rest of the market, the prices of copper and nickel and zinc in particular, have been quite horrific and weve seen closures of mine capacity in all those metals in Australia, and I expect to see one or two more come through over the next couple of months before things turn up. But they will turn up, because again, supply side issues on these commodities, mean that there isnt a huge overhang of capacity, not a huge over hand of supply so if consumption holds and starts to pick up modestly next year, were going to find though, that the inventory managers, right throughout the pipeline, are going to want to increase their inventory levels, particularly at times while prices are low and interest rates are low.
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