Commodity markets on a knife-edge: over the last month, high volatility has hit the global financial markets with stocks, bonds, currencies and commodities all plunging in value. This has sent an ugly chill through institutional and retail investors alike.

Author:Siddioi, Moin
Position:View from the market

The cost of everything from metals, minerals and precious group metals (PGMs) to commodities such as sugar, as well as crude oil, rocketed in the first half of 2006. The exponential rise in commodity assets took the financial industry experts, and even cautious macro-focused investors, completely by surprise.


Base-metals prices in May, for example, reached record highs on the London Metals Exchange (LME), with copper smashing through the $8,800/tonne (t) mark, while the price of nickel, zinc and aluminium hit $23,100/t, $3,980/t and $3,310/t respectively. The LME, which generates a staggering annual turnover of $4.5 trillion, accounts for 90% of the global metal trading market.

Anglo-American, the diversified mining group, must now be regretting its 2002 decision to divest from copper-rich Zambia (see Countryfile Zambia, page 52) that is now reporting a boom in copper production and profitability. PGMs, too, jumped on the bandwagon with gold rising to a 26-year peak of $730 a troy ounce (oz), platinum $1,325/oz and silver $15.17/oz. Meanwhile, crude oil, the world's most important commodity, reached $75.35 a barrel--representing a sixfold increase since 1999. Even natural rubber prices rose 54% over the past year.

Consequently, rising raw materials costs have increased producer price inflation and fears of interest-rate hikes in the developed world. That, in turn, would affect consumer spending and corporate investments, squeezing profits and undermining worldwide growth.

Societe Generale, the French investment bank, issued this caution: "Commodities are desperately fashionable at the moment. Just every piece of news is viewed as bullish. There is great fear that at some point there will be a dramatic correction. And the higher they go, the more dramatic it is going to be." Helmut Eschwey, chief executive of German group Heraeus Holding GmbH, agrees: "The rally has been enormous (but) it can't go on forever."


During mid-May, many commodity markets suffered heavy sell-offs, but commodity prices still remained well above their five-year moving average. For example, so far this year, the average oil price is in the mid-$60s, up from $28.9/barrel in 2003. Similarly, LME 2003 spot prices for copper and nickel were $1,780/t and $9,638/t respectively.

Underlying rationale

The reasons behind these electrifying markets are quite straightforward. They include a burgeoning global demand, tight...

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