COMMODOTIES ROLLERCOASTER

Written on the 18 March 2010

Commodity prices have dug their way out of their lulls and continue to rise but how far will they go? Deloitte assurance and advisory partner Matthew Sheerin tells Brisbane Business News about why he’s bullish in the long term, but isn’t ruling out a rollercoaster ride for commodities in 2010.

THE supply and demand equation clearly points to a positive future for commodity prices, but what makes Sheerin weary about short-term speculation is that the gains since July come from a different formula entirely.

“What’s happened recently is not just a supply and demand equation but has very much to do with views around economic recovery, and is significantly linked to the $US exchange rate,” he says.

“I have the view that exchange rates can be the leader, and if we see a significant strengthening of the $US, which some forecasters are anticipating, if that would happen then in my view that could lead to softer commodity prices.

“But I still think there’s some real risk that the $US can weaken, which is good news for commodity prices.”

Sheerin believes now might be a good time to sell for speculators geared to commodities, but for those who have the cash and patience, now is also a good time to buy.

He wouldn’t bet on exploration companies facing long-term uncertainty and doesn’t rule out rollercoaster movements when exchange rates and economic circumstances change – this is his assessment for 2010 and beyond.

Coal and Iron Ore

“For bulk commodities, particularly in Queensland for coking coal and in WA for iron ore, I think the China story is still a good one. There has been significant interest in coal over the last six months, which has kept prices up.

As we see recovery in other countries and traditional buyers of coal come back, it’s reasonable to expect coking coal will stay strong, but I doubt it will get to the levels we saw in 2008.”

An analyst from one of Australia’s largest banks indicated to Brisbane Business News that market expectations for thermal coal price rises are in the order of 15 to 20 per cent, with coking coal likely to rise by 30 to 40 per cent.

Gold

“I like gold, I’ve been a gold bug for some time and the thing I like about gold is that we’ve seen a trend for centuries.

"We just saw a 200 tonnes purchase by the Indian central bank in December, so we’re seeing that central banks have strong interest in gold rather than being net sellers of gold as it’s been for decades previously. It’s a commodity that’s stood the test of time.

“Another reason down the track is that the US will face significant inflation – I don’t think in the long term that a sub-primed economy such as that can be without that risk. History has shown that one of the best investments against inflation is gold. Even if there is a setback in recovery, gold is still good.

Copper

“The copper price has jumped already since July to now in $US
terms at around 60 per cent and in $AUD 35 to 40 per cent. Copper is such an integral commodity as there’s so much of the economy that it covers. A lot of what’s constructed or made has a lot of copper into it.

Oi l

“Oil has already had a pretty good run. I think that if there was a commodity with the least potential to have price increases, and with more risk around it, it would be oil. Though the price is up at the moment, a lot of that is driven by extreme weather in the northern hemisphere.

"There might be some upside, but there’s more downside risk."

*The views expressed above are those of Matthew Sheerin and are not necessarily representative of Deloitte.


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