Three factors affect the commodity market next year
August 17 09:07:10, 2022
Over the past three years, in dollar terms, global commodity prices (excluding crude oil) have risen by 38%, including a 7% increase this year, which has stimulated the transfer of wealth from commodity consumers to commodity producers on a large scale. From the point of view of the crude oil market alone, the transfer of wealth since 2000 has been estimated to reach US$125 billion. Judging from the current situation, the high commodity prices may only make the global trade imbalance even worse. It is expected that there will be three factors affecting the turmoil in the international commodity market in 2005: the sustained development of China's economy; the increasing number of financial investors pouring into the commodity market; and the depreciation of the US dollar will have a bearing on how much commodity exporters will tolerate the appreciation of their currencies. According to some agencies’ forecasts, global economic growth will slow down in 2005, and commodity prices will decline. It is expected that the price of base metals will increase by 6%-10%, and copper prices may fall back. Gold prices will rise slightly, but other precious metals prices are likely to decline. Coking coal prices are expected to rise sharply, but crude oil prices will fall. China's demand is an important factor In the past three years, China's demand has had a certain impact on many international commodity prices. China's economic growth relies mainly on industry, and it has relied heavily on energy and various types of industrial metals in order to increase investment in manufacturing and infrastructure. According to JP Morgan data, China accounted for 90% of global steel demand growth in 2003 and 66% of global iron ore demand growth. At the same time, China also consumed 20% of the world's copper, 19% of aluminum and 8% of crude oil. According to Morgan Stanley’s forecast, China’s GDP growth rate for the next year will reach 7.8%, which is a certain drop from the estimated 9.3% this year, which will have a greater impact on China’s commodity demand next year. Compared with export-driven demand, it is expected that the expansion of domestic demand will have a greater impact on China’s demand for commodities. A choice of asset portfolio According to statistics, more and more financial investors favor commodity investment. Using commodities as a choice of asset portfolio will be another major factor affecting the overall demand for commodities. The major advantage of commodity futures is that it can effectively disperse portfolio risk. Although commodity prices fluctuate more violently than stocks and bond prices, their volatility is irrelevant to the volatility of securities and fixed-income bonds. Therefore, commodity investment can greatly reduce the overall risk of the portfolio. According to forecasts by the Goldman Sachs Commodity Department, in mid-2003, the capital for tracking the commodity index was about 15 billion U.S. dollars, and by the end of 2004 it had risen to about 40 billion U.S. dollars. Compared to pension funds and mutual funds investing in fixed income and stock market funds, this money is only a fraction. But this shows that long-term investors are increasingly aware that commodity prices can provide strong returns. Goldman Sachs reckons that since 1970, the annual return on investment of the Goldman Sachs Commodity Index has reached an average of 12%, while the average return on investment for major stocks and bonds over the same period has been between 8.5% and 11%. The Goldman Sachs Commodity Index has attracted nearly $30 billion in funds that track the index. The other commodity indices attracted a total of about 10 billion U.S. dollars, including the Reuters CRB Index and Deutsche Bank's Mobile Merchandise Index (LCI). More importantly, commodities can hedge inflation risks. In the context of rising inflation expectations, since stocks and bonds are positively correlated with inflation, commodities are an ideal choice for a portfolio. The exchange rate factor cannot be ignored. In the past few years, the rise in commodity prices was partly due to the depreciation of the US dollar for many years. This year, the US dollar depreciated by about 8.8% against the euro, and the US dollar has depreciated by as much as 15% since June. If prices are denominated in euros, the current prices of aluminum, zinc and gold are roughly the same as last year. It can be seen that the devaluation of the US dollar is an important factor in the rise of commodity prices. How the future trend of the dollar is still a factor that cannot be ignored. The issue of RMB exchange rate is still an uncertain factor in the market next year. This year, the renminbi has felt the pressure of appreciation, and it is expected that it will still face pressure to revalue the dollar. If the appreciation of the national currency affects the decline in export revenue, other Asian countries are expected to curb the appreciation of their currencies against the US dollar. Therefore, there is a cyclical chain between commodity prices and exchange rates. Goods are priced in U.S. dollars. Changes in exchange rates may affect the rise in commodity prices. In turn, changes in commodity prices can affect the decision of a country’s monetary authorities to appreciate or devalue their currencies.