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Global commodities profile rising

G. Chandrashekhar

The market boom is far from over and, perhaps, it has just begun.

Mumbai , Feb. 26

The upward stride of the commodity market, a journey that commenced sometime in 2003, after almost six years of depressed conditions between 1997 and 2002, has in recent months gained unprecedented momentum.

Surely, there are both demand side and supply side factors that have contributed to the bull-run in a number of commodities including energy, base metals, precious metals and agricultural goods. Prices of crude, copper, bullion and sugar, to name a few, have reached multi-year highs.

Indeed, the profile of commodities is rising, especially in emerging economies such as India primarily because the domestic market is integrating with the global market. High rewards - major commodity indexes have outperformed the equivalent equity and bond benchmarks in recent years - have encouraged investors to observe this hitherto largely unfancied market more closely and be more aware of investment opportunities.

Increasing interest

Institutional investor interest too is rising in developed economies. Estimate of the total amount of commodity tracking funds worldwide is estimated at over $50 billion. Mutual funds and pensions funds that have humungous sums of money (pension funds in the US are estimated to have over $ 2 trillion) are seeking to invest in commodities. Central banks in Asia are reportedly looking for asset diversification and gold is without doubt a hot favourite.

While global agricultural commodity supplies are being increasingly driven by the twin engines of technology (agricultural biotechnology) and farm support (huge subsidies by OECD economies), major growth markets of Asia - particularly, China and India, two of world's fastest growing significant economies - are contributing to both production and consumption growth.

Constraints

Seasonal and regional nature of crops as also weather conditions continue to impact farm goods markets and generate price volatility. On the other hand, supply constraints, natural calamities, geo-political concerns and inflation fears are main market drivers of non-agricultural commodities. These developments have combined to generate huge speculative interest in commodity markets, as a result of which the role of funds is becoming increasingly critical.While overall global commodity market outlook is currently positive, yet there is no denying the uncertainties the market faces. High crude prices threaten to slowdown global economic growth.

Intractable questions

How soon can supply respond to high prices? Would structural constraints stymie growth? With evidence of slowing imports, will China continue to register robust growth? Will it be soft-landing or a crash for the Asian giant? These are some of the seemingly intractable questions on top of everyone's mind.

Clearly, the commodity market boom is far from over; and many believe, and perhaps rightly so, it has just begun. Huge appetite for commodities - from foods to fibres to metals - in the Asian region is a compelling story. Every Asian seems to want to live the great American dream. With strong growth potential, Asia is emerging as the mover and shaker of the commodity market, transforming the commodity landscape. It is a wonderful market to invest if one can afford to take the risk and rewards too would be high indeed.

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