Copper, gold, iron ore and coal will lead a rally in commodities over the next two to three years as demand for raw materials from China and India outpaces supplies, according to Standard Chartered Plc.
“There is a lag between the supply and the demand and that’s going to drive these commodities higher over the next three years,” Ashish Mittal, the bank’s global head of commodity sales, said in an interview in Mumbai. “During the global financial crisis a lot of investments got postponed.”
The Standard & Poor’s GSCI Index of 24 raw materials beat stocks, bonds and the dollar for five straight months through April, the longest run in at least 14 years, as investors sought a haven against accelerating inflation. Goldman Sachs Group Inc. said this week it’s turning “more bullish” on raw materials and suggested buying oil, copper and zinc, reversing its call last month to sell commodities.
The Group of Eight leaders yesterday singled out the surge in commodity prices as a significant threat to the global economic rebound and pledged to cut the debt built up in the wake of the 2008 financial crisis. Food costs may extend gains as it will take time for producers to catch up with demand driven by the rapid growth of emerging economies, the Bank of Japan’s assistant governor Hiroshi Nakaso said yesterday.
Increases in commodity prices kept global food costs near a record in April, prompting central banks from Brasilia to Beijing to raise interest rates and helping spur conflict and riots in the Middle East and North Africa.
“People can manage with high fuel for cars but they can’t manage with high food prices,” Mittal said. “That is the biggest problem that governments are facing, because what you don’t want is unrest amongst the population.”
Mittal says agricultural commodities will move with crude oil prices, as gains in oil will spur demand for alternative fuels made from crops such as sugar, corn and palm oil.
An index of 55 food commodities rose to 232.1 points last month from 231 points in March as grain costs advanced, according to the United Nations’ Rome-based Food and Agriculture Organization. The gauge climbed to a record 237.2 in February.
The S&P GSCI Index plunged 11 percent in the week ended May 6, the most since December 2008. Still, it’s gained 10 percent this year, led by gasoline, gas oil and silver. Silver for immediate delivery has jumped 22 percent this year, while crude oil has advanced 10 percent. Gold for immediate delivery reached a record $1,557.57 an ounce on May 2, while copper futures in New York rose to an all-time high of $4.6575 a pound on Feb. 15.
“It’s good the correction happened because the run-up was pretty steep and it was one-way,” Mittal said. “We will see some of these commodities rally back up again.”
Commodity assets climbed $5.8 billion in April, bringing total assets under management to record $451 billion, according to Barclays Capital. Flows from the start of 2011 gained almost $23 billion, or $6.8 billion more than in the year-earlier period, the bank said in a report yesterday. Precious metals had inflows of $3.2 billion over the month, the largest since June 2010, and agriculture received $1.1 billion, it said.
Demand for commodities from India, the second-most populous nation, will increase, Mittal said.
“Consumption of commodities in India is still quite low,” he said. “As power plants develop, the road network develops, you see development happening in the hinterland. There will be an increase in consumption, an increase in demand from the current levels in India, and it’s going to be pretty substantial.”
India’s commodity demand has reached a tipping point and growth is set to accelerate significantly, with metals demand likely to increase 80 percent in the next five years, Barclays Capital said last November.
Coal demand in India may more than triple to 2 billion metric tons in the next two decades as Asia’s second-fastest-growing major economy seeks fuel to generate electricity and run steel and cement plants, according to the government.