Commodities Post First Annual Decline Since 2008 on Europe Debt

Commodities Poised for First Annual Decline Since 2008
Cotton is down 37 percent this year amid increasing output and dwindling demand. Photographer: Chris Ratcliffe/Bloomberg

Commodities posted the first annual drop since 2008, paced by declines in cotton, copper and cocoa, on concern that the sovereign-debt crisis in Europe and a cooling Chinese economy will sap demand for raw materials.

The Standard & Poor’s GSCI Total Return Index of commodities fell 0.1 percent to 4,885.3 at 3:50 p.m. in New York, down 1.2 percent for 2011. Cocoa plunged 31 percent in 2011 on signs of expanding supplies from Ivory Coast, the world’s biggest grower. Cotton fell 37 percent this year amid rising output and dwindling demand. Copper, often seen as an indicator of economic activity it is used in construction and automobiles, posted its first loss since 2008.

Economic growth in China, the world’s biggest copper user, will slow to 8.5 percent next year, after growing 10.4 percent in 2010, the Organization for Economic Cooperation and Development projected on Nov. 28. Manufacturing in December contracted for a second month as global growth faltered and Premier Wen Jiabao prolonged a crackdown on speculation in the housing market. Global equity markets have lost $6.3 trillion in value this year as Europe’s debt crisis and slowing economic expansion weighed on investor demand for riskier assets.

“The two biggest drivers have been the global economic environment and the Chinese economy,” said Dan Denbow, a co-fund manager of the $2.1 billion USAA Precious Metals and Minerals Fund in San Antonio. “What happens next year really depends on what happens with global growth. Investors may not be as quick to come back to commodities unless they get a very good feeling about global growth.”

Gold, Oil

Advances in gold, oil and cattle helped limit commodity losses. Gold, 10 percent higher in 2011, capped an 11th straight year of gains as investors seek protection against financial markets turmoil. Oil climbed 8.2 percent this year, the third annual gain, on speculation that escalating tension in the Middle East will disrupt supplies as a recovery in the U.S. economy bolsters demand. Cattle futures in Chicago rallied 12 percent as the U.S. herd shrank.

The dollar’s rally, up 1.6 percent this year against six foreign-exchange peers, has curbed demand for commodities priced in the U.S. currency. Treasuries gained 9.6 percent, Bank of America Merrill Lynch index data show. Still, raw materials outperformed equities as the MSCI All Country World Index of stocks dropped 9.5 percent.

European Crisis

Commodities plunged 46.5 percent in 2008 as the collapse of Lehman Brothers Holdings Inc. triggered the worst recession since the Great Depression and sent global equity markets tumbling. Raw-material prices rebounded 13.5 percent in 2009 and rallied 9 percent last year as governments around the world ramped up stimulus spending to boost their economies.

The S&P GSCI Index touched an 11-month low in October, extending its decline from an April peak to more than the 20 percent threshold of a bear market, as investors cut holdings of commodities amid slower economic expansion. There is a 50 percent chance of recessions in the U.S., the U.K. and euro-zone economies in the next 12 months, Nouriel Roubini, the economist who predicted the U.S. housing bubble that started the last slump, said in October.

Goldman Sachs said in a Dec. 1 report that the world probably will avoid a recession and maintained its “overweight” allocation to commodities, predicting a 15 percent return in the next 12 months. A close balance between supply and demand across raw materials “could drive a strong price rebound in early 2012,” Barclays Capital said this month.

Metals’ Performance

The LMEX index of six industrial metals retreated 22 percent this year, led by declines in tin, nickel and zinc. Spot silver is 10 percent lower in 2011, its first annual decline since 2009. Palladium fell 18 percent, and platinum lost 21 percent.

“Problems in the U.S., Europe and China have all contributed to the weaker performance this year,” said Nick Trevethan, a senior commodities strategist at Australia & New Zealand Banking Group Ltd. “The risk in moving into 2012 is what’s going to happen in Europe particular. Some kind of major events there could put more pressure on the market from a sentiment perspective.”

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