Commodities Trounce Stocks, Bonds on Oil, Soy Revival

Commodities Trounce Stocks, Bonds on Oil, Soy Revival

By Tan Hwee Ann and Pham-Duy Nguyen
April 2 (Bloomberg) -- Commodities are beating stocks and bonds for the first time in nine months, and the quarterly rebound is likely to continue on China's increasing imports of raw materials.
Oil, gold, soybeans and sugar for delivery at the end of the year on the New York Mercantile Exchange and the Boards of Trade in Chicago and New York show at least a 3.7 percent appreciation, beyond the 5.7 percent gain in the UBS Bloomberg CMCI index of 28 commodities through March.
``When we look at the supply and demand'' of most commodities, there's a lot ``to be very bullish about,'' said Larry Kantor, co-head of research in New York at Barclays Capital Inc., which told customers last week to buy tin, gold and corn. China has ``a voracious demand for raw materials.''
Imports of copper jumped 12 percent in February from a month earlier and were almost triple the level of a year ago, according to the Customs General Administration in Beijing. Crude oil purchases rose by 8 percent in the month and palm oil by 20 percent, the administration reported.
Copper rallied 8.4 percent in the quarter to $6,860 a metric ton on the London Metal Exchange, crude oil advanced 7.9 percent to $65.87 a barrel in New York and palm oil gained 3.5 percent to 2,064 ringgit ($597) a ton on the Malaysia Derivatives Exchange.
``We do see, across all commodities, phenomenal growth,'' Charlie Sartain, chief executive officer for copper at Xstrata Plc, the world's fourth-biggest producer of copper and nickel, said today in an interview in Manila. Demand for copper in China, the biggest buyer of the metal, may increase 8 percent to 10 percent this year, he said.
Quarterly Returns
First-quarter returns from commodities were more than triple the 1.6 percent gain in U.S. Treasuries and the 0.2 percent increase in the Standard & Poor's 500 Index. The Dow Jones Stoxx index in Europe added 2.5 percent, and German government bonds returned about 0.3 percent in the quarter. Commodities benefited from China's increasing imports of copper, oil and construction materials.
Stocks will suffer from a slowing U.S. economy, while European shares will be hurt by reduced profit growth, said Jane Drake, who helps oversee $10.4 billion as investment director at Tilney Investment Management in Liverpool, England. The Treasury benchmark 10-year note fell 7 cents per $100 face value last week, continuing a monthlong slump as Federal Reserve Chairman Ben S. Bernanke described inflation as his primary challenge.
``Over the next three months, commodities could outdo shares,'' said Shane Oliver, who helps manage $83 billion at AMP Capital Investors Ltd. in Sydney. ``China is importing heavily again'' to feed the world's fourth-largest economy.
Inflation Concern
Rising prices for food, metals and fuel may accelerate inflation, driving up manufacturers' costs and dashing speculation that central bankers from Washington to Tokyo will lower interest rates.
Inflation as measured by the U.S. Consumer Price Index rose at an annual rate of 2.4 percent in February, greater than economists forecast. The annual rate was 3.1 percent in 2006. Consumer prices rose 1.8 percent in the year through February in the 13 nations that share the euro, compared with a 2.4 percent increase a year earlier.
Fund managers say inflation and a weakening real-estate market are the biggest risks to stocks during the next year, according to a quarterly survey released last week by the Russell Investment Group in Tacoma, Washington.
``The bottom line for us is that commodities will outperform the other markets for the rest of the year due to serious problems in the equities markets,'' Christoph Eibl, who helps manage $1.1 billion at Tiberius Asset Management, said in a phone interview yesterday from Stuttgart, Germany.
Bernanke's View
Bernanke last week said central bank policy ``is still oriented towards control of inflation, which we consider at this time to be the greater risk'' than a slowing economy.
A 10.7 percent expansion in China's economy in 2006, the fastest pace in 11 years, is spurring demand for materials to build skyscrapers, bridges, roads, cities and cars. The Chinese government forecasts 8 percent growth for 2007.
The commodities rebound promises to revive export revenue from Russia and Saudi Arabia to Vietnam and Brazil and hurt importers including the U.S., Japan and Germany, the three biggest economies. BHP Billiton Ltd., based in Melbourne, and Exxon Mobil Corp. of Irving, Texas, the largest publicly traded mining and oil companies, may profit. U.S. builders may see costs increase for cement and copper.
Morgan Stanley the Bear
Commodities investors so far this year are the biggest winners. As recently as January, after commodities lost money for the first time in five years, Goldman Sachs Group Inc. said the outlook for higher prices was ``very much intact.'' Deutsche Bank AG told clients the drop was little more than a ``correction in a continuing bull run.''
A $10 million investment in the UBS Bloomberg index earned $570,000 in the quarter, compared with a $20,000 profit from the S&P 500. U.S. Treasuries returned about $160,000.
The bears, led by Morgan Stanley, aren't impressed. The firm's chief global economist, Stephen Roach in New York, and ABN metals analyst Nick Moore in London anticipate slowdowns in the U.S. economy later this year will damage demand and vindicate their forecasts. Moore in January said falling prices then marked the ``definitive end'' of the commodity price boom.
``More supply is coming in copper, and the economic headwinds continue to intensify,'' Moore said March 30 in a telephone interview. ``People should look carefully at the disconnect between the activities of traders and the fundamentals of the market.''
Roach says China may restrain growth, hurting consumption in a country that accounted for about 50 percent of the gain in metals and oil during the past four years.
Copper Demand
``With downside risks building for the world's most commodity-intensive economy, suddenly investors are reassessing the demand side of commodity markets,'' he said in a March 6 e- mail from New York. He didn't return telephone and e-mail messages to comment for this article.
Copper use may grow 12 percent this year in China, exceeding an 8 percent earlier estimate, Goldman Sachs, the world's biggest securities firm by market value, said March 27, raising price forecasts for iron ore and copper. Deutsche Bank, Europe's biggest investment bank by revenue, increased its projections for nickel, copper and iron ore a day earlier.
Yunnan Copper Industry Co., China's third-largest producer of the metal, said March 31 it was increasing output 11 percent this year to feed the rising demand.
Oil demand in China and India will continue to grow, said Jim Rogers, the author of ``Hot Commodities'' who predicted the start of the rally in 1999.
Corn, Ethanol
``China only uses one-fifteenth of what people in America use,'' he said, referring to China's 0.049 barrel of oil consumption per capita per day and the U.S.'s 0.677 barrel. ``Even if they use the same amount as people in Japan and South Korea do, imagine how much demand is yet to come.''
Developing economies will expand 6.4 percent in 2007, led by China and India, the world's two most populous nations, the Washington-based World Bank estimates. The U.S. economy will grow 2.1 percent, the bank projects.
``More people have downgraded their U.S. expectations, and upgraded their Chinese, Europe and Japan expectations,'' said Hans Kunnen, who helps manage $70 billion at Colonial First State Investment Australia Ltd. in Sydney. ``The driver is predominantly the almost self-sustaining growth in China and the reduced reliance on the U.S.''
Demand for oil is improving the outlook for ethanol and biodiesel fuel and pushing up the prices of agricultural commodities and food. Corn has surged 59 percent in the past year, hurting cattle ranchers, hog farmers and poultry producers.
Farm Lands
U.S. farmers this year will sow the most acres of corn since World War II and cut soybean plantings after record ethanol production boosted grain prices to a 10-year high, a government survey showed last week. A.G. Edwards & Sons Inc. forecasts that the rising demand will keep corn at around $4 a bushel, after ending last month at $3.745 a bushel on the Chicago Board of Trade.
Limits on farm lands and increasing demand of 5 percent a year will drive grain prices, said Michael Coleman, managing director at Aisling Analytics Pte., which runs a $450 million commodities hedge fund.
``It's not just because of food demand, which is rising rapidly because of increasing wealth, but also biofuel has created a new source of demand,'' he said March 26 in Hong Kong.
Defaults Increase
U.S. incomes and spending last month gained 0.6 percent, the Commerce Department said last week in Washington. That was twice the increase anticipated by economists. Prices rose 0.3 percent, while the National Association of Purchasing Management-Chicago's business barometer jumped to the highest in almost two years.
Defaults by subprime mortgage borrowers, or those with poor or limited credit histories, have damped prospects for a quick housing recovery.
The subprime meltdown hasn't hurt commodities because ``it's a small part of the overall market,'' said Richard Steinberg, chief investment officer at Boca Raton, Florida-based Steinberg Global Asset Management, which manages about $490 million. ``Eighty percent of the subprime market is still good. It's not the demise of the U.S. housing market.''
Home construction accounts for 5 percent of the U.S. economy, and when furniture, home-improvement spending and utilities are included, it rises to about 15 percent. Consumer spending is 70 percent.
``The world is doing better than we thought, and the slowdown in the U.S. is being offset by growth both in Europe and Asia,'' said Jan Loeys, London-based global head of market strategy at JPMorgan Chase & Co. ``As a result commodities and equities are likely to perform better than bonds or cash.''
To contact the reporters on this story: Tan Hwee Ann in Melbourne at hatan@bloomberg.net Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net .

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