Update 2 – Commodity Rout Far from Ended

[Charles RandallParticipant]

Commodity Rout Far From Ended as Recession Approaches (Update2)

By Claudia Carpenter and Millie Munshi
     Oct. 13, 2008 (Bloomberg) — The record 39 percent decline in
commodities since July 3 is nowhere near finished, if history is
any guide.
     The Reuters/Jefferies CRB Index of 19 commodities from
coffee to silver would have to drop another 37 percent to reach
the trough of the 2001 recession and 35 percent for the 1998
slide, when crude bottomed at $10.35 a barrel. The measure is 28
percent above its lowest during the economic contraction that
ended in November 1982. Copper, after its biggest weekly loss in
two decades last week, is still triple 2001 levels.
     While tumbling prices of oil, nickel and soybeans already
crippled stock markets from Moscow to Sao Paulo and sliced Alcoa
Inc.’s profits by 52 percent, investors say rising stockpiles of
copper and slowing energy demand mean prices will continue to
fall. The U.S. slowdown will last more than a year and be deeper
than any in three decades, according to Harvard University
economist Martin Feldstein, a member of the committee that charts
American business cycles.
     “This downturn is going to make 2001 look like a walk in
the park,” said Tim Mercer, chief investment officer of Hong
Kong-based hedge fund Musashi Capital Ltd., who sold all his
commodity investments in July. “This is the bursting of a 25-
year asset-credit bubble. People have really stopped spending
money, everywhere.”
     The CRB ended Oct. 10 at 289.89 after losing 11 percent
during the week. The index gained 29 percent in the first half,
the best start ever to a year, before tumbling 25 percent in the
third quarter.

                         Forecasts Slashed

     Goldman Sachs Group Inc. of New York cut its 2009 estimate
for lead by 17 percent and copper by 12 percent on Oct. 1.
Zurich-based UBS AG said Oct. 6 nickel will be 32 percent lower
than previously forecast, while platinum will be 50 percent less
than anticipated. Morgan Stanley of New York reduced its 2009
aluminum estimate by 20 percent three days later and palladium by
45 percent.
     Crude oil at $77.70 a barrel and copper at $4,790 a metric
ton, the Oct. 10 closing prices, are at least 46 percent below
their July peaks, signaling an end to record profit for Freeport-
McMoRan Copper & Gold Inc., the biggest publicly traded copper
producer, and energy producer Exxon Mobil Corp. in Irving, Texas.
     Exxon’s earnings may fall more than 2 percent to $45.9
billion in 2009, the first drop since 2002, according to data
compiled by Bloomberg. The company is scheduled to report its
next financial results on Oct. 30. New York-based Alcoa said Oct.
7 third-quarter earnings dropped by more than half to $268
million. Freeport-McMoRan of Phoenix said July 22 that second-
quarter profit fell 14 percent to $947 million.

                         Billions Lost

     Steel, metal and related producers of basic materials are
the worst-performing group this year in the MSCI World Index,
losing 48 percent so far, a larger decline than banks and energy
companies. Exxon Mobil plunged 20 percent last week to $62.36 in
New York trading.
     Russian shares, dominated by commodity companies including
OAO Lukoil and OAO Gazprom, lost 62 percent this year, helping to
wipe $230 billion from the wealth of the nation’s 25 richest
people in five months. Brazil’s Bovespa index, led by Petroleo
Brasileiro SA and Cia. Vale do Rio Doce, tumbled 52 percent from
its high in May to 35,609.54.
     The median estimate for U.S. growth next year in Bloomberg
surveys of economists has declined in eight of the last nine
months, with the odds of a recession now pegged at 90 percent,
compared with 50 percent in May. The U.S. economy will grow 0.1
percent next year, according to the International Monetary Fund.

                    `Irrational’ Concern

     “This is going to be a longer recession than the last four,
over three decades, where the average duration was about 12
months,” Feldstein, who retired in June as president of the
National Bureau of Economic Research, said Oct. 8 in a Bloomberg
Television interview. “It is going to be deeper in terms of
decline” in output, he said.
     The U.S. Federal Reserve is leading an unprecedented push by
central banks to flood financial markets with dollars, backing up
government efforts to restore confidence in the banking system.
Policy makers from the Group of Seven nations pledged at the
weekend to take “all necessary steps” to stem a market panic.
Democratic presidential candidate Barack Obama plans to give a
speech on the crisis, his campaign said in an e-mail today.
     “We’ve entered the realm of irrational anti-exuberance,”
said Doug Hepworth, a research director at New York-based Gresham
Investment Management LLC. “Commodities are part of it.”
     A slowdown is already leading producers to cancel projects,
which may restrict supply and limit the drop in commodity prices.

                          Gold Producer

     OAO Polyus, Russia’s biggest gold producer, said this month
companies are reviewing projects because of the credit crunch
that sent the three-month London interbank offered rate for
dollars to 4.82 percent last week from 2.79 percent three months
ago.
     Russia’s largest steelmaker, OAO Severstal, said Oct. 10 it
will slash output in Russia, the U.S. and Europe by as much as 30
percent. The Organization of Petroleum Exporting Countries called
a meeting for Nov. 18 and is “very likely” to cut output,
President Chakib Khelil said Oct. 9.
     Analysts surveyed by Bloomberg expect oil to average $100
next year, 23 percent more than the current forward prices. For
copper, analyst estimates are 38 percent higher.
     Futures on the London Metal Exchange show investors
disagree. The contracts suggest copper will cost $4,823 a ton a
year from now, compared with $4,869.50 for the closing price of
the contract for immediate delivery on Oct. 10. Crude oil for
delivery in October 2009, traded on the New York Mercantile
Exchange, is at $82.24, 5.8 percent more than the contract
closest to delivery on Oct. 10. Copper peaked this year at $8,940
a ton and oil at $147.27.

                        Financial Collapse

     “These curves are discounting huge declines in demand that
I don’t see happening,” said Pete Sorrentino, who manages $16.5
billion at Huntington Asset Advisors in Cincinnati.
     Crude oil rose as much as 5.1 percent today and copper and
most other commodities also advanced after governments in the
U.S., Europe and Asia pledged to avert a collapse in the
financial system.
     Copper stockpiles in warehouses monitored by the London
Metal Exchange rose 92 percent since a May 7 low to 209,325 tons.
Combined with reports from bourses in Shanghai and New York,
inventories are equal to 4.7 days of global usage, compared with
as little as 3.2 days in July.
     The International Energy Agency, the adviser to 28 nations,
on Oct. 10 said oil demand next year will be 440,000 barrels a
day less than anticipated a month ago, at 87.2 million a day.
This year’s gain will be the smallest since 1993, the Paris-based
IEA said.

                      Presidential Election

     Growth in global crude consumption slowed to 0.3 percent in
2001, from 1 percent the previous year, according to BP Plc data.
Demand shrank 0.1 percent in 1991, the first decline since 1983,
the data show.
     “We won’t see these prices going back to their record highs
anytime soon,” said Catherine Virga, an industrial metals
analyst at CPM Group Inc. in New York, a consultant to companies
including Barrick Gold Corp. “The economic outlook is bleak. The
weakest point will be in the fourth quarter of this year and the
first quarter of next year.”
     U.S. economic growth, a subject that has dominated debate
before the Nov. 4 presidential election, will drop to 1.6 percent
this year and 1.2 percent in 2009, from 2 percent in 2007,
according to economists surveyed by Bloomberg. During the last
U.S. recession, growth slowed to 0.8 percent in 2001 from 3.7
percent in 2000.
     “I don’t see any optimism for commodity markets until well
into the second half of 2009,” said William O’Neill, a partner
at Logic Advisors in Upper Saddle River, New Jersey. “Banks are
really overestimating how soon the turnaround will come. We’re
mired in a global economic recession.”

–With reporting by Chanyaporn Chanjaroen in London, Pham-Duy
Nguyen in Seattle and James Poole in Singapore. Editors: Stuart
Wallace, Steve Bailey.

[Charles RandallParticipant]

This seems a little pessimistic but directionally correct – the current recession impacts to metals/other commodities is already much worse than on Energy & Oil markets. Perhaps it could lead to much lower project cost for materials
on those not already under construction.
 
  I think when comparing past recession bottom support levels they are leaving out the current large delta between market demand/needs and much lower mine/well supply capabilities.  The only thing that has been keeping them balanced is recycle loop that is stretched way too tight – the economy slowdown will give it time to catch up until prices return to level that supports new mines/wells that balance demand levels.
 
Regards

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