ANALYSIS - Slowdown to shackle industrial commodities in H2

LONDON Thu Aug 19, 2010 11:44pm IST

Related Topics

LONDON (Reuters) - Industrial commodities face an uphill struggle over coming months as economic growth slows, but the price collapse seen in the last quarter of 2008 is unlikely.

Recent data from the United States has raised doubts about the strength of recovery in the world's largest economy. Meanwhile China is tightening policy to rein in price pressures.

Surveys of purchasing managers in the manufacturing sector are strong indicators of demand for industrial commodities. Many of them still show expanding activity, but not at the pace seen in previous months.

"We're going to see a slower second half and we will see pressure on prices of commodities like copper and crude," said Philippe Bonnefoy, founder of fund firm Cedar Partners.

"Demand will soften ... Crude is holding up, but I wouldn't be surprised to see a fall to the high 50s."

Crude oil is trading at about $75 a barrel from a level near $30 a barrel in December 2008 in the aftermath of the collapse of Lehman Brothers when the market tried to price in the possibility of a 1930s-style depression.

Benchmark copper on the London Metal Exchange is trading at around $7,400 a tonne from a four-year low below $3,000 a tonne in December 2008.

Even if the slowdown picks up pace, fund managers say manufacturers have been disciplined this business cycle. Any destocking of metals, if there is any, will not happen to the extent it did in the final quarter of 2008.

Copper used in power and construction industries tumbled toward $6,000 a tonne in early June as the market tried to price the possibility of sovereign default in the euro zone.

China and the United States are the world's top two consumers of copper and crude oil.

"Based on what I can see, it doesn't look as if we are going to have a double-dip," said John Wong, a portfolio manager at CQS New City Investment Managers. "Some of the lead indicators are showing signs of weakening, but they are not all negative."

For double-dip graphic click:

here

NUGGETS OF INFORMATION

Signs of weakness is one reason why the U.S. Federal Reserve earlier this month took a small, but significant step to boost growth, saying it would use cash from maturing mortgage bonds it holds to buy more government debt.

Fund managers and analysts watch data such as industrial production and gross domestic product, which would shed light on demand and prices for industrial commodities. But surveys of manufacturers are key indicators for future demand.

The Institute for Supply Management's (ISM) index of factory activity in the United States showed manufacturing activity grew in July, but at its slowest pace this year.

A survey of executives in China's manufacturing sector conducted for HSBC showed contraction for the first time since March 2009.

These avidly watched surveys of manufacturing activity also contain another nugget of information -- new orders indexes.

For graphic of new orders indexes against copper prices click: here

In the U.S. ISM survey the new orders index slipped to 53.5 in July from 58.5 in June and for the HSBC China survey the number was 47.9, below the 50 line which separates expansion from contraction for the second month running.

"Growth in China is still at levels that the western world can only dream of, but this year it has had to pay more attention to the inflation side," said Sean Corrigan, chief investment strategist at Diapason Commodities Management.

Beijing has applied the brakes to money and credit growth and has rolled out a raft of measures to deter speculative buying in real estate. It has also raised the proportion of deposits that banks must hold in reserve.

"There is a property and banking bubble in the country, clearly demand is softer then it was. But there are not as many long positions as there were in May, to that extent there is something of a cushion on the downside," Corrigan said.

"We'll have to see how it develops in the first two or three weeks of September, whichever way it goes will probably set the trend for the rest of the year."

The first week of September sees the release of the August surveys of purchasing managers in manufacturing.

(Graphics by Scott Barber; editing by Sue Thomas)

FILED UNDER:

Surprise Rate Cut

Reuters Showcase

Insurance Bill

Insurance Bill

Opposition support bolsters prospects for insurance reforms  Full Article 

SBI Share Sale

SBI Share Sale

SBI's up to $2.4 billion share sale likely by end April - sources   Full Article 

Eicher Share Sale

Eicher Share Sale

Truck maker Volvo sells shares in Eicher Motors  Full Article 

Beef Ban

Beef Ban

After beef ban, Hindu groups force abattoirs to close   Full Article 

Monsoon Season

Monsoon Season

Exclusive - India expects better monsoon rains this year  Full Article 

Services Growth

Services Growth

Services growth at eight-month high in Feb - HSBC PMI  Full Article 

'India's Daughter'

'India's Daughter'

Documentary on 2012 Delhi gang rape banned in India  Full Article 

Capex Slashed

Capex Slashed

Cairn India slashes 2015-16 capex on falling crude   Full Article 

Coal Imports

Coal Imports

India coal imports in Feb jump from year ago, but drop m/m  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage