New commodity bull market ready to charge ahead – by Simon Avery (Globe and Mail – July 4, 2011)

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A resurgence in global growth will fuel a new bull market later this year for commodities ranging from copper to corn, according to a leading market watcher. While prices for several key raw materials have recently taken a tumble, “it’s always tricky to assume commodity prices have peaked, unless you get a major, major slowdown in global economic growth,” says Patricia Mohr, economics and commodity market specialist at Bank of Nova Scotia. “I think that what is probably occurring is a mild growth slowdown.”

The Scotiabank Commodity Price Index dipped 2.6 per cent in May from a month earlier, led by a 3.9 per cent decline in oil and gas prices. But it still remains 56 per cent above its low in April, 2009.

The most important factor determining future prices is the outlook for China. The country accounts for 40 per cent of world demand for the four key basic metals – copper, aluminum, zinc and nickel – while the U.S. consumes less than 10 per cent. “China really does dominate the commodity outlook,” Ms. Mohr says.

Chinese inflation hit a 34-month high in May, with the CPI up an annualized 5.5 per cent. The rise has prompted the Chinese government to repeatedly tighten monetary policy to try to dampen inflation, sending fear through the commodity markets that demand will suddenly dwindle.

But Ms. Mohr says the anxieties are overblown. Several forces have caused global economic momentum to pause this spring and summer, including the slowdown in China’s industrial activity, as well as concern over the credit crisis in the euro zone and the realization that Greece and other countries face slower growth because of austerity programs.

In addition, the earthquake and tsunami in Japan disrupted supply chains, especially automotive capacity. Japan provides about one-third of the parts used by U.S. auto manufacturers and 15 per cent used in China. That parts shortage is now easing, which will help lift global industrial production beginning in late summer, Ms. Mohr says.

Rising industrial production bodes well for industrial commodity prices, especially copper, a bellwether for other base metal prices. “Copper could have quite a rebound in the second half of this year,” Ms. Mohr says.

Her forecast calls for the price to reach at least $4.40 (U.S.) a pound by the fourth quarter. Copper traded at a record of $4.60 on Feb. 14 and today is just above the $4 mark.

The red metal is an essential element in China’s massive infrastructure program and is used in everything from air conditioners to high-speed railways. Chinese companies began to reduce their purchases of copper beginning in late 2010 and continuing into 2011 in response to rising prices. High prices were exacerbated by the tightening of credit by Chinese banks, which made it harder for importers to get letters of credit. In response, China began to tap its own inventories of copper.

Ms. Mohr says the liquidation of those inventories is going to come to an end very soon, if it hasn’t already.

In the near term, she is most bullish on agricultural commodities, believing they will be one of the strongest sectors this fall. A late planting season because of poor weather, as well as growing demand from emerging markets, will continue to lift prices.

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