The Hindu Business Line : Commodity prices up on demand-led growth

BASE metals and precious metals prices as also the energy markets have all been moving up over the last several weeks, nay months. Is the current trend of rising commodity prices a `bubble' fuelled by a combination of speculation and reflation? Will the bubble burst; and if yes, when? What factors drive prices up?

The view that the current high level of commodity prices represents a bubble betrays a misunderstanding of the dynamics currently driving the commodity markets, according to Barclays Capital Research.

"Prices are high because very strong demand growth is taking place against a backdrop of constrained supply. It is fundamentals that are driving prices, not hedge funds," a group of expert commodity researchers from Barclays said in their latest report.

Pointing out that of greater significance than movements in spot prices is the move up in price levels at the back end of the commodity price curves, the report notes that this process is most advanced in the energy sector, but it is one that has further to run in many other markets.

There is now increasing realisation amongst market participants that high commodity prices are structural, not simply cyclical phenomenon, and are signalling the need for substantial investment in new production capacity.

Without a move up in long-term average prices, this investment will simply not take place.

Notwithstanding the concerns about slowing economic growth in both the US and China weighing upon industrial metal prices in particular, the experts said there were expectations of strong metals demand growth to reassert itself into the last quarter of this year and this would propel industrial commodity prices higher once again.

On the crude oil market, Barclays stated that despite recent price falls, the picture in oil is still one of a crude oil supply and refinery system working flat out to meet demand. A lack of spare crude oil production capacity is seen as the key price driver.

"The normal seasonal upturn in demand is likely to contribute at least another two million barrels per day of global oil demand by the fourth quarter and the possibility of a capacity crunch emerging in the fourth quarter cannot be discounted," the report asserted.