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Commodity Monthly

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Financial meltdown bad for commodities

Tue, Sep 30 2008, 16:49 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S

The financial crisis is sweeping across all markets at the moment - and commodities are not the place to hide. The current turmoil has one sure loser (besides equity and debt holders!), and that is growth. Banks collapsing or struggling to remain alive hammers lending and consequently investments. The message is clear: the financial crisis does and will have an effect on global growth going forward. Many people had hoped the huge US bailout plan would mark a turning point this week, but its rejection by the US House of Representatives means the crisis continues to rage. The crisis is now well and truly global, and all financial institutions are feeling the liquidity squeeze in an unprecedented way.

Last week we published our new global growth forecast in Global Scenarios, and in general we have slashed all global growth centres, with the Middle East now the only major pocket of strength remaining. In Europe, Germany in particular has suffered, and morphed from last man standing to last man falling. The slowdown has spread to most emerging markets, with GDP growth and industrial activity weakening in Asia, Central and Eastern Europe and Latin America. In our view, the global economy is now on the brink of recession.

As a consequence of the bleaker growth outlook we have slashed our commodity forecast for Q4 and for 2009, though we still believe there is some upside for prices in 2009. In our view the market has already priced in a very negative growth trajectory in 2009. It is no big surprise for the commodity market that global growth is under pressure. If we see signs of relief in financial markets or incipient signs of a better growth outlook, commodity prices will be the first asset class to move higher. But uncertainty is high in commodity markets and further price drops should be expected as long as the financial crisis continues to rage as intensely as at present. That said, some of the "automatic stabilisers" in the market have started to work. OPEC has drawn a line the sand at USD 100 a barrel for oil; aluminium, zinc and nickel prices are trading close to or below marginal costs; and the strengthening of the dollar should now start to slow down. Hence, we maintain our medium-term positive view of the commodity market, but certainly recommend caution given the worries about economic growth. On the other hand, the current volatility in commodity markets provides a window to hedge commodity exposure at attractive levels. We find the downside for energy and aluminium well protected at current levels, for example.

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Published on  Tue, Sep 30 2008, 16:53 GMT