Monday, December 20, 2010

Copper and oil seen as the next 'gold mine'

Straits Times: Sun, Dec 19
Time and time again investors are advised to buy stocks, bonds and real estate to grow their wealth.

But some - like senior vice-president and portfolio manager at Toronto-based First Asset Investment Management, Mr John Stephenson - disagree.

He said this advice 'is what worked 10 years ago', and that investors are better off considering commodities because prices have nowhere to go but higher.

Firstly, supply is tight, inventory is slowly depleting, and demand is bound to be overwhelming on the back of rapid economic growth in developing countries.

These nations, led by China, are expected to contribute to two-thirds of global economic output by 2020.

Secondly, relaxed monetary policy and expectations that troubled economies like the United States may continue to print new money will help push prices of real assets upwards.

Also, financial investors favour commodities when they seek protection against currency and inflation risk, said Singapore chief investment strategist at UBS Wealth Management Research, Mr Kelvin Tay.

Assistant vice-president of commodities research at Barclays Capital in Singapore, Ms Chen Xin Yi, said it is also hard to ignore how commodity prices have so far 'proven resilient to the bouts of macro-economic uncertainty and aftershocks from the credit crisis'.

Ms Chen noted that the Dow Jones-UBS Commodity Index has gone up 22 per cent since the turn of the year.

Prices for oil, coal, copper and gold have also hit highs for the year in recent weeks, she noted, adding that a strong rally is under way in agricultural commodity markets.

And while gold has long been a commodity that Singaporean investors are familiar with, The Sunday Times asked these experts what other commodities would be worth keeping an eye on.

Two items appeared on all their lists: Copper and oil.


Although global mine supply of copper has improved modestly in the third quarter of this year, 'there has been nothing to suggest the gap between mine supply and consumption will narrow anytime soon', said Ms Chen.

For instance, China - the largest consumer of refined copper in the world - is already poised to see consumption grow by 14 per cent this year, she said.

Copper is used in power generation, electrical appliances, heat transfer, air-conditioning and infrastructure.

As an illustration of the tight supply, 'globally we've got only eight days of copper supply on the London Metal Exchange', said Mr Stephenson.

Barclays Capital targets an average price of US$9,450 per tonne in the fourth quarter of next year, while UBS expects an average price of US$11,500 per tonne.

Copper is currently trading at around US$9,000 per tonne.

Mr Dominic Schnider, head of commodity research at UBS Wealth Management Research, also noted the potential launch of physically backed copper exchange-traded funds (ETFs) next year.

Commodity ETFs are usually designed around an index which may represent a broad variety of commodities, or in some cases hold a high weightage on just a single commodity depending on how it is constructed.

They either hold the actual physical commodity or purchase future contracts on the commodity to track price changes.

The option for investors to own physical copper will drive up private investment demand on top of the industrial demand which would also translate into an upside in prices, a UBS Wealth Management Research report noted.


Earlier this month, oil hit a two-year high of just above US$90 a barrel after trading between US$70 and US$80 in the past year.

This was attributed to strong demand in emerging countries like China, a weak US dollar, and the Organisation of Petroleum Exporting Countries' (Opec) changed stance towards higher prices.

Also, without substitutes, oil is primarily used as a transportation fuel, and prices will move sharply higher as the global economic recovery continues, noted Mr Stephenson.

UBS expects overall crude oil consumption to grow by almost two million barrels per day, or 2.2 per cent next year, as incremental demand from emerging markets remains firm.

Supply is not likely to catch up given that OECD crude oil inventories outside the US have now fallen below seasonal norms, said Ms Chen.

Strong demand will also shift focus to Opec supply which would consequently bring down its spare capacity and cut inventory, UBS noted.

The Swiss giant expects an average price of US$95 per barrel next year, with price spikes of above US$100 per barrel in the year.

Barclays Capital forecasts an average price of US$91 by the fourth quarter of next year.

By the end of 2012, Mr Stephenson suspects oil could hit US$150 per barrel.

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