The Wall Street Journal-20080123-Signs Hint of Waning Demand- A Multiyear Boom Gets Slowdown Test- -Stronger for Longer-
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Signs Hint of Waning Demand; A Multiyear Boom Gets Slowdown Test; 'Stronger for Longer'
For several months, emerging markets and commodities have enjoyed spectacular runs. But with emerging-market stocks tumbling, investors are asking whether commodities are next.
Stock-market dives in Asia and Europe were accompanied this week by selloffs in metals and energy markets overseas and in global commodity markets in the U.S. Although commodity prices recovered somewhat after the Federal Reserve's rate-cut announcement yesterday, oil is more than 10% off its Jan. 3 intraday high of $100.09 a barrel. It closed yesterday at $89.85 a barrel on the New York Mercantile Exchange.
The consumption of oil, copper, steel and other raw materials in a broad Asian infrastructure expansion has been the primary driver of today's multiyear commodities boom.
Until now, conventional wisdom has been that demand from emerging markets would continue regardless of U.S. economic conditions. Commodities continued to soar even though energy consumption in many Western economies was low to flat for the past couple of years and even after the housing slowdown curbed U.S. consumption of materials such as copper.
This spawned arguments that commodities would stay "stronger for longer" because emerging markets' prospects had decoupled from U.S. economic problems.
Yesterday's early-day wobbles are a sign, however, that more traders believe a U.S. recession might spell trouble for regions that had been seen as bottomless pits of commodities demand.
Eric Wittenauer, an energy and industrial-metals analyst at A.G. Edwards, said he doesn't buy into the view that a U.S. downturn has little effect on Asian demand. "A significant downturn in the U.S. is going to impact the emerging markets as well as more developed foreign economies," he said.
As stock-market indexes in India, Hong Kong, Japan and China were plummeting yesterday, copper and zinc fell by their maximum 4% daily limit on the Shanghai Futures Exchange. Until Monday, copper had been a big gainer in 2008. Important nickel and zinc benchmarks fell 3.1% on the London Metal Exchange.
Wayne Atwell, president of Pontis Capital Management, a Connecticut natural-resources investment firm, said a falling Chinese stock market is "going to add anxiety to the part of [Chinese] consumers, who might cut back on spending. So you do run the real risk of a slowdown. Undoubtedly, you're going to shave off some of the demand for commodities." But he adds that the scope of the impact "is still up in the air."
Indeed, prices brightened in late U.S. trading. Copper on the Comex division of the New York Mercantile Exchange rebounded from an overnight low of $3.0715 a pound to settle down 1.1% at $3.1890.
While expectations for a short-term dent in the commodities boom are rising, many analysts cite structural, long-term factors such as supply bottlenecks as reasons these markets haven't yet peaked. Recession fears, some contend, are causing indiscriminate but temporary selling.
"Commodities tend to be an independent market and an uncorrelated asset class, except in times of liquidity crises," said Jay R. Feuerstein, chief investment officer at 2100 Xenon, a Chicago commodities hedge fund. When markets feel a liquidity crisis, they are all going to go down, said Mr. Feuerstein.
Agriculture markets aren't attracting as much pessimism, in part because of U.S. mandates that increase the use of crops in alternative fuels and raise competition for food production. Goldman Sachs Group Inc. recently revised its price forecasts upward on various agricultural commodities.
And oil prices, while on a yo-yo, may sink only so far. Philip Verleger, an independent energy economist based in Aspen, Colo., says the credit crunch in the U.S. has meant higher short-term financing costs for companies such as refiners to buy and hold oil in storage.
"One can expect many firms, especially the independent refiners, to cut stocks," Mr. Verleger wrote this week. Low stocks support prices. "A recession does not necessarily need to be accompanied by an oil price decrease," he said.
Analysts at the Barclays Capital unit of Barclays PLC said just- released customs data from China are bullish for industrial metals. China, a big commodity producer itself, was a net importer of aluminum in December, and its imports of copper and nickel rose. But given what Barclays Capital calls an uncertain macroeconomic outlook, it added: "We expect prices to remain choppy."
