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Commodities Slump Grows

by Sck
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Author: Australasian Investment Review

The downturn in commodities since the middle of July has been pretty vicious and this week it seemed to be made more tense by the way the market fell across the board as Hurricane Gustav squibbed it and didn’t prove to be the major destroying storm that many had feared. The way, oil, gold, copper and other metals, plus major grain prices fell after the passing of Gustav indicates that the old fear about supply shortages no longer dominates thinking in these commodity markets. Most commodities were weaker to steady overnight Wednesday, but it was more of a holding pattern than any sort of recovery. For Australia, as we start enjoying the fruits of the boom, it’s a timely reminder that more needs to be done here to make the economy more efficient and more productive. We are at present relying on higher receipts for our coal and iron ore exports and not much more as prices for other resources have titled downwards since the slump started. If anything should slow China’s economy in the next year or so to a much lower level of growth, then we will be exposed to a much sharper slump in activity than we saw with yesterday’s GDP numbers. The Reuters-Jefferies CRB index, a global benchmark for commodities prices, has fallen 18.9% since June 30, to a six-and-a-half-month low, after surging in the first half by almost 30%. July was in fact the worst month for many commodity indexes for 30 years or so because mainly of the steep drop in oil prices. Prices are still higher than they were a year ago, but as we move through the rest of 2008 and into 2009 that premium will either simply disappear with each month’s comparison, or will show up in more price falls to the point where the comparison is negative. We have to assume that just as commodities probably overshot and went to high from March through mid-July that prices will overshoot on the way down and fall to unsustainably low levels. But some analysts warn that because their financial investors involved there could be a much steeper fall than expected simply because of the impact of momentum. Oil is trading closer to $US100 a barrel than it has for more than five months, gold eyed and eased under $US800 an ounce, copper, is glancing towards the $US3 a pound level and wheat, soybeans and corn futures prices are busy retracing former price rises. Gold was trading at $US799.90/800.90 an ounce in Asia late yesterday, down from $US804.90/806.25 an ounce late in New York Tuesday, when it fell as low as $US790.40 after oil dropped and the dollar rallied. It traded just above $US800 an ounce in New York overnight.Gold struck a nine-month low around $US773 in mid-August. Oil traded around $US109 a barrel in New York. This sharp sell off in commodities, led by oil seems to have had its first notable victim among investors with a multi-billion dollar hedge fund imploding and now facing being broken up. Bloomberg has reported that this slump had ensnared Ospraie Management of the US which is going to close its biggest after it fell almost 27% in August and 38.6% from the start of 2008. It’s 20% owned by the struggling Lehman Bros investment bank. Bloomberg said the Fund had a value of $US2.8 billion at the start of last month, so the loss would have been in the order of $US750 million in the month. Bloomberg said a letter from founder, Dwight Anderson, to investors explained that the Ospraie Fund lost 26.7% in August, after a “substantial sell-off in a number of our energy, mining and resource equity holdings.'’ “I am extremely disappointed with this result and the fund’s sudden reversal in performance. After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.'’ The Ospraie Fund was started in 1999. Bloomberg said that the closure of the Ospraie Fund leaves the New York-based firm overseeing three remaining funds with more than $US4 billion in assets, down from $9 billion in March. Commodity market indexes fell by around 10% in August, and are off 20% since the slump started in Mid-July as investors switched out of mining and resource investments and into mainly US shares because of expectations the US wouldn’t slump as much as Europe, Asia the UK or Japan would. It sold out of Iluka in recent days, according to a statement to the ASX from the beach sands miner and processor yesterday evening. Oil closed at around $US115.46 a barrel in New York on Friday before the holiday long weekend. At one stage overnight the price was down around $US105 a barrel. Copper plunged as well, losing nearly 11 US cents a pound in New York to close at $US3.29 a pound (a seven month low) while gold fell by around $US24 to $US810 an ounce. The Australian dollar weakened, falling to a day’s low of 82.70 US cents, that’s also the lowest for around a year. It then recovered back over 83 US cents. While that followed the Reserve Bank’s 0.25% rate cut yesterday, it wasn’t the major reason. The rate cut had been widely expected and was in the price of the currency: it was the sharp drop in oil, copper and other commodities that hit resource-based currencies including the Aussie overnight. The futures prices for wheat, corn and soybeans all fell sharply as well as Gustav faded. It was a significant slump across the board for commodity prices. Metals in London, led by lead also fell sharply. Markets were tossed around as investors wondered about whether this rapid correction would finish. Not helping was a gloomy assessment of the current state of the world’s major economies that helped ended the whoopee over oil prices. The Organisation for Economic Cooperation and Development warned that overall, “the picture for the major economies is of a particularly weak second half”. It saw a growth uptick for the US, but the eurozone and UK economies will “barely creep forward” in the second half of this year. The OECD suggested that global financial turmoil might be entering a “new phase” with the stream of bad news reported by banks now reflecting generally economic weakness rather than direct effects of the credit squeeze. The OECD revised up significantly its forecast for US growth this year, after significantly stronger-than-expected second quarter data. It expected 1.8% growth, compared with its previous forecast of 1.2%. But surveys out yesterday showed a sharper than expected fall in US construction spending and a contraction in manufacturing, led by a drop in forward orders, employment and inventories. Exports were up and inflation eased. The OECD gave itself an out by warning that there was a lot of uncertainty about how quickly the effects of the US fiscal stimulus package would fade. The OECD was worried about inflation in Europe and overnight those concerns were given some additional impetus with news that producer prices in the 15 country eurozone rose 1.1% in July, compared with 1% in June. That made for an annual rate of 9% (not much different to the US) in the year to July. European retail sales fell 2.1% in July compared with July 2007, after a record 3.1% drop in June. That won’t be enough to get the ECB to cut rates tonight, while the Bank of England’s next move is unclear, despite the overwhelming weight of gloomy news about the British economy. Its decision will come tonight, our time. A desperate Labour Government has attempted to boost the sinking housing sector by significantly expanding the stamp duty exemption on house purchases of homes worth up to 175,000 pounds from 125,000 pounds. It will cost near $A2 billion in a budget already heavily in deficit. Money will also go to helping people avoid repossession (nearly $A400 million). But the British pound continued its worst fall in 16 years. IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

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Australasian Investment Review (AIR) is a free daily news service covering global financial markets with a focus on Australia, New Zealand and Asia. Each day our team of experienced journalists presents you with a concise digest of expert opinions and analysis on trends and backgrounds that matter in these markets. Subscriptions are free at

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