Commodities set to take breather in '08

Anything pulled out of the ground has been on a roll for years. Slowing global growth should change all that

DAVID PARKINSON

January 1, 2008

After years of surging prices in the global commodity markets, 2008 might prove a more difficult year, as a slowing global economy should take the wind out of the sails of much of the market, analysts say.

But while opportunities for investors could prove more limited, there could still be a handful of commodities poised to outperform. The trouble will be trying to find them.

"We're looking at a dramatic slowdown of the global economy," said Derek Burleton, senior economist at Toronto- Dominion Bank. "That's going to have some meaningful impact on commodity demand."

"We're looking at markets that are near historical highs. What more can you expect?" said analyst Randy Mittelstaedt, who tracks agricultural futures for R.J. O'Brien & Associates in Chicago. "The easy opportunities are long gone."


While the Reuters/Jefferies CRB Index, the global benchmark for commodity prices, has advanced nearly 17 per cent in 2007, the tone of the market over all has been mixed. The year's gains largely reflect the surge in crude oil, which is up 57 per cent and is the most heavily weighted component of the CRB Index, and to a lesser extent gold (up 32 per cent), soybeans (up 76 per cent) and wheat (up 76 per cent).

Meanwhile, prices for base metals have been falling, while such products as natural gas and cattle have been in a sideways drift. With oil having retreated from its November peaks, the overall outlook for commodities as a group looks to be flat to downward heading into 2008.

"We seem to be at the front end of a decline here," said Edward Meir, commodity analyst at Man Financial Inc. in Darien, Conn. "I'm not that bullish on most of the commodities for 2008."

Nevertheless, the analysts believe there are a few rocks that have been left unturned in the commodity market, offering some opportunities for gains in 2008. Favourite picks for the year include hogs, natural gas, corn, soybeans, aluminum and tin.


"We have hogs at the top of our list," Mr. Burleton said. Hog prices have recovered somewhat after hitting four-year lows in November, but remain near two-year lows, hurt by slow seasonal demand and a large U.S. herd. But with slaughter rates picking up and high prices for other meats expected to lift demand, Mr. Burleton expects hog prices to rebound in the second half.

NATURAL GAS

Natural gas has been the poor cousin to oil in the past year, drifting sideways as supplies in storage have swelled. But those low prices, coupled with Alberta's plan to increase its royalty take, have severely slowed drilling activity for new natural gas wells. Mr. Burleton believes this slowdown in new supplies should fuel higher prices in the coming months.

CORN/SOYBEANS

Mr. Mittelstaedt said there is still "substantial" potential for gains in corn or soybean prices in the coming year - but maybe not for both. The two products, which have become favourites among speculative hedge funds, have traded off each other because farmers tend to shift acreage from one crop to the other depending on where they see the better prices. Last year, the rising interest in ethanol production sent corn prices skyward and prompted farmers to switch to corn in droves, which served to ease corn prices by boosting production while at the same time lifting soybean prices due to the reduced acreage for the crop. Mr. Mittelstaedt said a modest shift of acreage this year back to soybeans would probably help keep prices for both crops relatively strong. However, a more dramatic swing back to soybeans - or, alternatively, a surprisingly small acreage shift - "the one that doesn't get [the acreage] could go absolutely ballistic."

ALUMINUM/TIN

Aluminum and tin are expected to be the hottest base metals in 2008. Mr. Meir sees some potential for a rally in aluminum prices, which are off more than 15 per cent from their early-2007 peaks. "Demand is still very strong," he said, adding that aluminum doesn't look nearly as pricey as some of the other base metals. Mr. Burleton agreed that the demand outlook for aluminum is hot, which should bode well for a price rebound in the near term. However, he remains concerned about high inventories and rising production capacity, which he said could drag prices down again by the second half.

Mr. Meir thinks supply worries could give tin a further lift in 2008, after the metal hit new heights in 2007. A tighter regulatory framework for tin production in Indonesia, the world's leading producer of the metal, could force marginal producers shut down rather than bringing their production facilities up to code, he said.