Last week a dear friend of mine sent me an email asking for some clarification on our thoughts on a rising commodity market. He characterized our on-going commentary this way, I get the distinct impression that you do NOT believe the commodities markets will continue to move higher – based on your belief that the world economy is, and will remain tepid. He went on to say, Because, I have got to tell you, pretty much every technical sign ever invented by man is pointing to a move higher in the financial markets. All that is needed is a little more market volume and it’s all sunshine and roses.
Before we address technical signs etc., we’ll refer to a couple of predictions recently made by Nouriel Roubini, the noted economist, also a professor at New York University. He told attendees of the Diggers and Dealers mining conference in Australia yesterday that, China may have overstocked on commodities, risking a slowdown in buying and a correction in prices in the second half of this year. We have made similar comments. He went on to say that he does expect prices for commodities to increase in step with rising general economic growth which he believes will occur during the second half of this year with prices increasing next year. Here, we have echoed similar comments recently though we did state that some of those price increases wouldn’t stick until the middle of 2010. Roubini mentions the fact that China has overbought inventory relative to its growth rate. Our concern relates to the fact that the supply/demand equation may also get out of whack in that too much Chinese production may come on stream without enough demand to support it.
The other part of Roubini’s comments of particular interest relate to the long-term economic outlook. Here Roubini appears more pessimistic, ¦the global economy will begin recovering near the end of 2009 before possibly dropping back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth.
Taking a look at July ISM (Institute of Supply Management) data released Monday afternoon we see some positive trending. The PMI reached 48.9 or 4.1 points higher than the reading from last month (44.8). According to Norbert Ore, Chair of the ISM, The decline in manufacturing was slower in July when compared to June, as the more leading components of the PMI the New Orders and Production Indexes rose significantly above 50 percent, thus setting an expectation for future growth in the sector.
The only area in which we see more than a 3-month positive trend, relates to customer inventories. Here most suppliers believe customer inventories are too low. This is the fourth month in a row in which suppliers believe customer inventories remain too low. Manufacturing production also appears on the rise, however, we only have two months of data supporting that finding. We look for three month’s worth of data before concluding a new trend has appeared.
Though the data all appears to point to some positive trend lines, we still remain as our friend suggested tepid regarding the rate of global economic growth. It certainly appears as though the worst is behind us but it just goes to show that little rays of sunshine can have a very big impact on prices. And as we previously commented, if we were buyers we would look to cover at least a portion of our annual requirements during any softening of prices this summer,” with the exception of aluminum noted in this morning’s earlier post.