[PolicyCoon]

Commodities have had quite a run in the year to date, although not without substantial divergence within the asset class. Base metal prices as measured has risen almost 20%. Of course, not all metals are equal with copper up 50% compared to the poorest performers, aluminium and nickel, which are flat. Crude oil has also firmed, up by 14%. Bulks are a different story. Thermal coal prices have fallen more than 23% while spot iron ore prices in China have fallen 13% this year.

The shock from the collapse of Lehman Brothers, and the resulting credit crisis, had a significant hit on global trade. However, since the low it has now bounced back to around 50 – the point where Chinese trade is neither contracting nor expanding. The Singapore PMI did not fall as far but to date its recovery has also been more modest. In the US, the rate of decline in trade has stabilised. The biggest shock to international trade has occurred in Europe. And while all the other trade PMIs have shown at least signs of stability by April, the European trade PMI is still looking for a base. Industrial Europe is still in contraction mode.

The most recent data suggests that the Chinese economy may have passed its weakest point. Note the improvement in the PMI, industrial value added and electricity production. However, the ongoing relative weakness in petroleum products (down 9%yr to March) even though the economy is growing at a 6% pace and industrial production is up through the year, suggests some doubts must linger about the ability of the Chinese economy to lift commodity prices on its own.

While the pace of the decline in global output is set to moderate from here, it is difficult to see any growth until at least the end of 2009. However, without some new shock, we have to accept that the commodities market may be finding a new equilibrium. Nevertheless, it is still some way off yet before the intersection of supply cuts and resurgent demand will be sufficient to sustain a new cyclical upswing in prices. As such, commodity prices is expected to bounce around current levels for most of this year, with some vulnerability to the downside, before a more meaningful recovery starts near the end of 2009 or early 2010.

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