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So What Now For Commodity Prices?

Date 13/10/2008

The Right Side

Garry White

The implication of billions of dollars being pumped into markets has finally hit home. The dollar is falling today. Commodity prices are rising.

The credit crisis has hit commodity prices hard… but prices should rebound strongly once the financial crisis eases. It’s just a question of when confidence returns.

Commodity prices have been hit by deleveraging, as money has been whipped out of the sector to cover liabilities elsewhere. But funding for future projects has also been put in jeopardy. This will hit commodity demand – but it will also hit commodity supply as well as miners find it more difficult to raise funds.

Indeed, some of the hardest-hit markets have been those with a high exposure to commodities, such as Russia. With a lack of access to capital, production capacity is going to be difficult to grow. This is a long-term bull factor in the commodities story.

Some of the hardest-hit shares have also been commodity producers, as investors worry about global economic prospects. Valuations appear to be discounting Armageddon.

Personally, I do not think Armageddon is approaching. That means deep value has been uncovered.

Even after today’s 10% gain, BHP Billiton is still trading on a 2009 p/e of just 4.2. Once this crisis is over, I expect shares like BHP will be the ones leading the charge forward.

Access to financing is going to store up supply constraints – miners will not be able to raise funds to develop mines. This will lead to falling production and falling inventories.

The same conditions will be created which have propelled commodity prices to record-high levels over the last few years. History will repeat itself in the commodity sector.

I also still believe that the Chinese growth story still has much, much further to run. Many areas in the central and western part of the country are still underdeveloped. China will continue to urbanize. Remember the Chinese economy is still expected to grow at 8%-9% next year. That’s still a dizzy figure.

So, although there has been a torrid climate over the last few months, as financial markets collapsed in a shocking and spectacular fashion, all is not lost.

All aspects of the economy are going to take some time to recover, but when markets start to normalise, I expect that once again commodity plays will be leading the charge forward.

Regards,

Garry White
For The Right Side

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Commodity Prices Should Rise As The Current Financial Crisis Eases

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