RUSSIA FORUM BUZZ. Global Commodities in a Slowing Global Economy
James Barty believes there are reasons to be optimistic about the long-term commodity outlook now that the bubble has burst. The short-term outlook is not so good – there is a massive output gap, and capacity must be adjusted in line with lower demand. Demand should stay strong in emerging markets, especially in fast-growing economies like China and India, but we are likely to see increasing energy and material efficiency in mature economies, which will dampen global demand growth. He also believes that Russia will need a more flexible currency regime to be prepared to deal with the lower commodity prices.
Jim Rogers expressed strong confidence that commodity prices and demand will recover. The world keeps running out of oil, metals and bulk commodities, and there will be little investment in exploration and development until the economic crisis is over. Oil could surpass $200/bbl one day. The timing is the tricky part, though, as the current recession may be lengthy. He thinks that Russia ought to invest in exploration of new mineral reserves, as the country is currently nibbling at investments made in Soviet times.
Paul Robinson is bearish on commodities in the short term, but thinks that good days lie ahead. Demand is weak and producers have not yet done all the work needed to match supply and demand. Copper is under the biggest risk of another big decline – most producers are still making profit and there is no incentive to cut production, because everyone is desperate to keep more cash on hands. Other base metals have probably bottomed out. Development of untapped reserves in Africa and other underexplored places will require massive investments in infrastructure, which will only be justified by much higher commodity prices. This will not happen yet, though – the rest of 2009 is going to be bleak, with maybe some recovery starting next year. Government buying (such as China building strategic metals reserves) will help in the short term but lead to more problems down the road.
Neil Meader believes that gold is in good position to rise above the $1,000/oz level this year as investors stampede into safe assets. It will go lower when the economy starts recovering, but the downside will be limited by a likely spike in inflation, as governments keep pumping money into the economy.
PGMs will have different fortunes – platinum is likely to move in tandem with gold on investment demand, while palladium will keep suffering from higher exposure to industrial demand (which has been hit by the slowing economy), as well as from concerns about the palladium market being the hostage of one dominant producer (Russia).
Silver is going to perform poorly in the short term on slack industrial demand, but will recover exactly when gold starts weakening.
John Campbell said that mining companies have only started reporting losses – there will be much more negative news flow during next two to three months. China is a wildcard, and it may destabilize the markets greatly, especially where it has significant overcapacity (steel and aluminum). Structural cost inflation warrants an optimistic long-term view on commodities, but the recovery is unlikely to come soon.
Sergey Grebenkin noted that the crisis has prompted all producers to review their assets and dispose of the least competitive among them. Large producers have not cut production by much, but have pared down all capex. Small and medium miners are struggling to stay afloat, and some will not be here by the end of the day.
Christof Ruehl, Group Chief Economist and Vice President, BP
James Barty, Global Strategist, Arrowgrass
John Campbell, Partner, Assurance, Consumer Industrial Products, PricewaterhouseCoopers
Sergey Grebenkin, CIS Regional Manager, Trafigura Beheer BV, Moscow representative office
Neil Meader, Research Director, GFMS Limited
Paul Robinson, Group Manager, Non-Ferrous Metals, CRU Group