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23-05-2011, 08:04 AM
The culprit is once again wanton and reckless speculation? 
May 23, 2011
CAI JIN
'Hot' money behind commodities bubble
The boom had little to do with normal supply and demand pressures
By Goh Eng Yeow, Senior Correspondent
COMMODITY prices appear to be heading south, something that will please consumers battling with soaring living costs.
But the wild swing in their prices recently has left people baffled.
In the past, shifts in demand and supply have tended to be the determinants when it comes to pricing commodities, whether 'hard' ones coming out of the ground like copper and iron ore, or 'soft' commodities such as wheat and rice, which are grown.
Demand has historically been more stable. Even with the rapid growth in consumption from huge emerging economies such as India and China, demand for hard commodities has been growing at only about 3 to 4 per cent a year, thanks to the technological advances that have allowed manufacturers to cut down on usage.
For soft commodities, increases in crop yields have helped to mitigate the impact of global population growth.
Instead, price shocks have mostly been triggered on the supply side by natural disasters, from hurricane Katrina, which in 2005 disrupted United States oil production and caused a spike in crude oil prices, to deadly forest fires in Russia last year, which destroyed vast tracts of wheat and sparked a run-up in prices.
But the absence of natural calamities in areas containing key oil-producing sites and important agricultural producers makes this year's run-up in the commodities market a lot more difficult to explain.
Indeed, going by the US Department of Agriculture's bullish forecast, there will be a strong rebound in global wheat production, to 670 million tonnes from last year's 648 million tonnes.
Given that, pure supply-and-demand arguments have failed to account for the recent double-digit swings in commodity prices in percentage terms.
Market watchers blame the commodities market's roller-coaster ride on the billions of dollars of 'hot' money sloshing around the global financial system looking for higher yields.
In the past 12 months, the commodities market has boomed. Total investments covering a wide range of hard and soft commodities from gold to wheat jumped by 58 per cent to US$427 billion (S$529 billion).
Since August last year, raw material prices as measured by the Thomson Reuters-Jefferies Commodities Index have surged 30 per cent, despite an 8 per cent correction this month.
Last August also happened to be the month when the US Federal Reserve chairman Ben Bernanke unveiled his programme - called Quantitative Easing Two or QE2 - to print a further US$600 billion of fresh money to buy bonds and other forms of debt from American banks.
That was on top of an earlier US$1.75 billion buying programme in March 2009 to fight the global financial crisis.
Mr Bernanke's intention was to put more money into the hands of US banks to lend to cash-strapped businesses. But the extra cash also leaked into the financial markets and boosted demand for assets such as commodities.
Also fostering the speculative commodity bubble have been the innovative ways used by Chinese lenders to get around the curbs imposed on lending by the People's Bank of China (PBoC) in its fight against inflation, and extend credit to borrowers.
Take the sharp run-up in copper prices and subsequent correction.
The Financial Times noted that early this year, there was a sudden frenzied buying of copper in China by businesses unrelated to the metal trade, because of the attractive financing offered by Chinese banks.
As copper is imported, mainland banks could offer financing to buyers in the form of letters of credit rather than loans.
Since this financing is an 'off-balance sheet' item, it is not reflected in the lender's loans book.
The scheme enabled traders to get financing in US dollars, sell copper for yuan, and ride on any appreciation in the Chinese currency along the way.
The Financial Times also noted that the bear market for copper coincided with the PBoC's move to stop this lucrative trade a month ago. Copper prices dived as the massive artificial demand triggered by the speculative purchases collapsed.
And apart from the PBoC's move to plug the leaks from Chinese banks, impending measures by other major central banks may mop up the liquidity fuelling the global boom in commodities.
Mr Bernanke's QE2 programme ends next month and the flood of fresh money flowing into the global financial system will cease.
In anticipation of this, the weak greenback has regained lost ground and made the costs of borrowing in US dollars to finance wagers in commodities more expensive.
Traders have also been squeezed by the higher margin requirements imposed by big commodities markets such as the Chicago Mercantile Exchange. In many cases, they were forced to close their positions after failing to find the additional top-up cash.
As a result, investment banks such as Citigroup are predicting that in the coming months, commodity prices will come down to levels that more accurately reflect supply and demand.
News that the commodity bubble has been licked might irk speculators, but at least it will be cheered by consumers anxiously watching the rising cost of living.
engyeow@sph.com.sg
May 23, 2011
CAI JIN
'Hot' money behind commodities bubble
The boom had little to do with normal supply and demand pressures
By Goh Eng Yeow, Senior Correspondent
COMMODITY prices appear to be heading south, something that will please consumers battling with soaring living costs.
But the wild swing in their prices recently has left people baffled.
In the past, shifts in demand and supply have tended to be the determinants when it comes to pricing commodities, whether 'hard' ones coming out of the ground like copper and iron ore, or 'soft' commodities such as wheat and rice, which are grown.
Demand has historically been more stable. Even with the rapid growth in consumption from huge emerging economies such as India and China, demand for hard commodities has been growing at only about 3 to 4 per cent a year, thanks to the technological advances that have allowed manufacturers to cut down on usage.
For soft commodities, increases in crop yields have helped to mitigate the impact of global population growth.
Instead, price shocks have mostly been triggered on the supply side by natural disasters, from hurricane Katrina, which in 2005 disrupted United States oil production and caused a spike in crude oil prices, to deadly forest fires in Russia last year, which destroyed vast tracts of wheat and sparked a run-up in prices.
But the absence of natural calamities in areas containing key oil-producing sites and important agricultural producers makes this year's run-up in the commodities market a lot more difficult to explain.
Indeed, going by the US Department of Agriculture's bullish forecast, there will be a strong rebound in global wheat production, to 670 million tonnes from last year's 648 million tonnes.
Given that, pure supply-and-demand arguments have failed to account for the recent double-digit swings in commodity prices in percentage terms.
Market watchers blame the commodities market's roller-coaster ride on the billions of dollars of 'hot' money sloshing around the global financial system looking for higher yields.
In the past 12 months, the commodities market has boomed. Total investments covering a wide range of hard and soft commodities from gold to wheat jumped by 58 per cent to US$427 billion (S$529 billion).
Since August last year, raw material prices as measured by the Thomson Reuters-Jefferies Commodities Index have surged 30 per cent, despite an 8 per cent correction this month.
Last August also happened to be the month when the US Federal Reserve chairman Ben Bernanke unveiled his programme - called Quantitative Easing Two or QE2 - to print a further US$600 billion of fresh money to buy bonds and other forms of debt from American banks.
That was on top of an earlier US$1.75 billion buying programme in March 2009 to fight the global financial crisis.
Mr Bernanke's intention was to put more money into the hands of US banks to lend to cash-strapped businesses. But the extra cash also leaked into the financial markets and boosted demand for assets such as commodities.
Also fostering the speculative commodity bubble have been the innovative ways used by Chinese lenders to get around the curbs imposed on lending by the People's Bank of China (PBoC) in its fight against inflation, and extend credit to borrowers.
Take the sharp run-up in copper prices and subsequent correction.
The Financial Times noted that early this year, there was a sudden frenzied buying of copper in China by businesses unrelated to the metal trade, because of the attractive financing offered by Chinese banks.
As copper is imported, mainland banks could offer financing to buyers in the form of letters of credit rather than loans.
Since this financing is an 'off-balance sheet' item, it is not reflected in the lender's loans book.
The scheme enabled traders to get financing in US dollars, sell copper for yuan, and ride on any appreciation in the Chinese currency along the way.
The Financial Times also noted that the bear market for copper coincided with the PBoC's move to stop this lucrative trade a month ago. Copper prices dived as the massive artificial demand triggered by the speculative purchases collapsed.
And apart from the PBoC's move to plug the leaks from Chinese banks, impending measures by other major central banks may mop up the liquidity fuelling the global boom in commodities.
Mr Bernanke's QE2 programme ends next month and the flood of fresh money flowing into the global financial system will cease.
In anticipation of this, the weak greenback has regained lost ground and made the costs of borrowing in US dollars to finance wagers in commodities more expensive.
Traders have also been squeezed by the higher margin requirements imposed by big commodities markets such as the Chicago Mercantile Exchange. In many cases, they were forced to close their positions after failing to find the additional top-up cash.
As a result, investment banks such as Citigroup are predicting that in the coming months, commodity prices will come down to levels that more accurately reflect supply and demand.
News that the commodity bubble has been licked might irk speculators, but at least it will be cheered by consumers anxiously watching the rising cost of living.
engyeow@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
