Commodities, heading for the first quarterly advance in a year, may struggle to repeat their gains in the next three months as supply expands and speculators sell.
Nickel may average 29 percent less in the third quarter than now, crude oil 16 percent, copper 14 percent and petrol 10 percent, analyst estimates show. Hedge funds and speculators cut their bets on higher prices by 23 percent in the two weeks to June 23, based on an index using US Commodity Futures Trading Commission data. The World Bank said on June 22 that the global recession would be deeper than it had expected three months ago.
"Commodities have gotten a little ahead of themselves," said Walter Hellwig, a fund manager at Morgan Asset Management. "As long as there's uncertainty about growth, that's going to be headwind commodities won't be able to overcome."
Another slump
Commodities have risen 14 percent this quarter, led by nickel, oil and sugar, after three consecutive declines, according to the Reuters/ Jefferies CRB Index of 19 raw materials. New York University economics professor Nouriel Roubini said this year's 55 percent advance in oil costs, combined with widening budget deficits, might cause another global slump.
The World Bank's forecast for the global economy to contract 2.9 percent this year may curb sales just as producers expand output in anticipation that the worst is over.
Russian steel maker Evraz Group said last week it had restarted a blast furnace and Germany's Trimet Aluminium began raising its output last month. China's aluminium industry is starting or reopening 2.1 million tons of annual capacity, equal to three weeks of demand, according to Barclays Capital.
Opec raised oil output by a cumulative 485 000 barrels a day in April and May, the first gains since last July, Bloomberg estimates show. The increase comes as the International Energy Agency expects global consumption to fall by 2.9 percent from last year, the biggest drop since 1981.
Nickel output rose for two consecutive months through April to 109 400 tons, according to the International Nickel Study Group. Daily average aluminium production expanded in April and May to 95 400 tons, the International Aluminium Institute reported.
Lead mines extracted more metal in March and April, taking monthly output to 300 000 tons, said the International Lead & Zinc Study Group. Zinc mines increased production to 890 900 tons in April, the group reported. Output of nickel, zinc and lead in April hit the highest levels since last December.
Lead, aluminium and tin stockpiles in warehouses monitored by the London Metal Exchange have risen at least 87 percent this year.
Centrica, the UK's biggest energy supplier, has a record amount of natural gas in its Rough storage site for this time of year. Heating oil in independent storage in the Amsterdam-Rotterdam-Antwerp area has risen 27 percent this year to 2.72 million tons, according to PJK International.
"We expect commodity prices to come off in the next two or three months," said Francisco Blanch, the head of global commodity research at Merrill Lynch. "Oil and some metals markets will suffer because of large inventory accumulation."
Expanding stockpiles may not be enough to stop prices from climbing higher. US crude oil inventories are 8.7 percent higher than in January, according to the Energy Department, yet prices have rallied 55 percent this year to $69.16 (R549) a barrel on the New York Mercantile Exchange.
Oil will decline to an average $58 a barrel in the third quarter, according to analyst forecasts compiled by Bloomberg. Copper will fall to $4 354 a ton on the London Metal Exchange as nickel averages $11 250 a ton.
Energy "markets have shown us in the past that prices are capable of rallying even with high inventories", said Daniel Masters, a portfolio manager at the Global Commodity Systematic fund. "The market rallied on the prospect that future captive capacity would be insufficient, and that's still true today."
On June 20 hedge fund manager George Soros said the worst of the global financial crisis was over. The crisis, which started with the collapse of the US subprime mortgage market in 2007, has led to more than $1.47 trillion of write-downs and losses at financial institutions.
The Organisation for Economic Co-operation and Development raised its forecast for the economy of its 30 member nations for the first time in two years on June 24. The economy of the world's most industrialised countries would shrink 4.1 percent this year and grow 0.7 percent next year, the group said.
Hedge funds and other large speculators are holding a net 653 915 contracts betting on higher prices, according to an index of combined positions in 20 commodities tracked by the US Commodity Futures Trading Commission. Their net long position reached 854 743 contracts earlier this month, from as few as 86 220 in December.
Fundamentals
"Some of the run-up was money that had been laying on the sidelines and poured into the market without looking at the fundamentals, and that's the froth that's got to come out," said Peter Sorrentino at Huntington Asset Management. "We could see the commodities lose about a third of the gain they've had in this run up."
The CRB index rose as much as 33 percent from March 2 to June 11, but it has given up some gains since then to now be 25 percent higher.
The 82-company Bloomberg World Mining index, which plunged 61 percent last year, has rebounded 41 percent this year.
Europe's manufacturing and service industries were still contracting this month, according to a survey of purchasing managers by Markit Economics. The European Central Bank forecasts the euro zone economy may shrink 4.6 percent this year and 0.3 percent next year.
Deutsche Bank chief operating officer Hermann-Josef Lamberti said on June 18 that the market was still in "the eye of the storm" as the credit crisis affected the economy.
Pierre Montezin, a fund manager at Plenum Investments, said: "Commodities will likely tread sideways from now, unless there is some substantial data of economic recovery. In the short term, I'd position for a correction." - Bloomberg