Goldman sees commodities bull run over as returns trail stocks

Domestic Consumption

Most commodities will drop this year as China’s economy moves from a focus on infrastructure to domestic consumption and services, Citigroup’s Ed Morse said in a May 20 report. That means investors should pay more attention to supply and demand rather than just broad economic trends, he said. The bank predicted the end of the supercycle in November. UBS AG and Credit Suisse Group AG made similar forecasts this year.

The S&P GSCI more than tripled since the end of 1999, including 11 gains over the past 13 years, setting records in everything from oil to gold to copper. Producers struggled to keep up as China’s economy expanded more than fivefold. That attracted a surge of investments and assets under management totaled $409 billion in March, from $154 billion at the end of 2008, Barclays Plc estimates.

Corn Supply

Pessimism about commodities is focusing on the price of raw materials as the pace of growth in consumption slows. China will use 5.2% more copper this year, from a gain of 6.8% in 2012, Barclays estimates. The nation is still using enough copper in cables each month to circle the globe almost 90 times, government data show. It will consume more than one in every five tons of global corn supply this year as its hog herd reaches 447 million animals, six times the U.S. figure.

In the U.S., where builders use about 400 pounds of copper in a single-family home, sales of new properties in April reached the second-fastest pace since July 2008. Central banks in the U.S., Europe and Asia are still printing unprecedented amounts of money to boost growth, adding to the almost doubling of global sovereign debt to $23 trillion since the end of 2008, a Bank of America index shows.

Biggest Exporter

Supply expansions may fall short of forecasts as bad weather curbs crops in the U.S., the biggest exporter, and mining is disrupted. Farmers in Iowa, the largest U.S. corn and soybean grower, had their wettest April and May in records going back to 1873. Freeport-McMoRan Copper & Gold Inc.’s Grasberg operation may be shut for as long as three months after a tunnel collapsed last month. The Indonesian mine is the biggest source of copper after Escondida in Chile, where port strikes have disrupted metal shipments.

“The outlook for commodities is likely to be brighter,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion of assets. “The outlook will turn bullish when demand starts moving higher. I’m not jumping in yet with both feet and am going to let the story develop first, which I expect to happen over the next few months.”

The International Monetary Fund cut its forecast for Chinese growth this year and next on May 29. It’s now predicting 7.75%, from an earlier projection of 8% for 2013 and 8.2% for 2014. The U.S. economy grew at a 2.4% annualized rate in the first quarter, the Commerce Department said May 30, cutting its previous estimate of 2.5%.

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