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TRANSCRIPT
Commodities: The Past, The Present and The Future
Presentation to Bloomberg LP / 16 December 2009, Hong Kong
Mr Dan Doctoroff / President
Presented by CWA Global Markets
Peter McGuire
Founder / Managing Director
2
Introduction
3
Introduction
4
Introduction
Commodity bull markets ranked by % gain in CRB (CCI) Index
Low High % Rally Rally duration Mean CPI (yoy)
2001-08 October 2001 182.83 July 2008 615.04 236.4% 81 months 2.8%
1971-74 October 1971 96.40 February 1974 237.80 146.7% 28 months 4.9%
1977-80 August 1977 184.70 November 1980 337.60 82.8% 39 months 10.2%
1986-88 July 1986 196.16 June 1988 272.19 38.8% 23 months 3.2%
1992-96 August 1992 198.17 April 1996 263.79 33.1% 44 months 2.8%
Source: Commodity Research Bureau
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Introduction
DOW JONES INDUSTRIAL AVERAGE
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Chronology
A look at some of the major global events
that have shaped global commodity markets post-WWII:
Bretton Woods Conference – July 22, 1944
US and UK looking ahead to the end of World War II, meet in Bretton Woods, New Hampshire and create a post-war,
monetary system based on fixed exchange rates and the fixed convertibility of the dollar into gold. The Bretton Woods
conference also sets the stage for the creation of the World Bank, the International Monetary Fund (IMF), and the General
Agreement on Tariffs and Trade (GATT). The Bretton Woods currency system is highly successful for over two decades but
finally breaks down in 1971 under stress from the US inflation and trade deficit and the need for more global flexibility.
Nixon Closes the gold window, ending Bretton Woods – August 15, 1971
President Nixon announces that the US government will no longer exchange gold for dollars. That effectively ends the
Bretton Woods monetary system that had been in place since 1945. Major currencies are freely floating by 1973. Along
with the gold announcement, Nixon also announces 90-day wage and price controls and a 10% import surcharge in an
attempt to curb inflation and the US trade deficit.
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Chronology
Soviet Grain Purchases – Summer 1972
The Soviet Union during the summer of 1972 purchased a huge amount of corn, wheat, soybean meal from the US in
response to poor domestic crops, thus causing grain and soybean prices to soar in late 1972 and early 1973.
Arab Oil Embargo – October 17, 1973
Arab members of OPEC halt exports of oil to the US in retaliation for supporting Israel during the Yon Kipper War. Oil
prices triple from $3.50 to $10–11 per barrel range by 1974–75. The embargo lasts only 5 months (until March 1974)
but the long-term impact is severe.
US Recession and Bear Market – 1973 – 75
Serious US stock bear market emerge in response to the Arab Oil Embargo and the major US economic recession from
Nov- 1973 to March- 1075.
US citizens can legally own gold – 1975
US allows its citizens to own gold bullion. Owning gold was illegal from 1933-1974 except for jewellery and coin
collecting.
8
Chronology
China begins economics liberalization – 1978
The people’s Republic of China starts reforming its economy from a centrally-planned economy to a market-orientated
economy, but retains communist political structure. Rapid Chinese economic growth begins (average annual Chinese
GDP growth is +9.7% from 1978-2005).
1979 Oil Crisis
Crude oil prices more than double from $15 to $40 per barrel on oil supply disruptions caused initially by the Iranian oil
production. Americans experience long lines at the gas pumps as shortages are worsened by President Carter’s
gasoline price controls.
Gold and silver hit record highs – January 1980
Gold reaches a record high of $850.00 (London PM gold fix on Jan21, 1980) and silver in New York reaches a record
high of $48.00 (NY daily close) due to inflationary 1970s, but precious metals prices then plunge as Volcker cracks
down on inflation.
9
Chronology
US Recession – 1980
US recession (January 1980 to July 1980) is caused by Fed’s crack-down on money supply and inflation surge in oil
prices tied to the Iranian revolution. First dip of the “double-dip” recession.
US stocks begin bull market – 1982
After plunging on an inflation-adjusted basis from 1973-1982, the US stock market finally enters a long-term bull
market that lasts until 2000, with corrections in 1987 and 1990.
Berlin Wall Falls – November 9, 1989
Berlin Wall, which was originally built in 1961 by the Soviets to separate East and West Germany falls. Unification of
East and West Germany follows in 1990, creating economic dislocation for Germany.
Nikkei index peaks and Japan’s bubble later bursts – December 1989
Japan’s stock market peaks and the stock and property bubble starts to burst. Japan suffers more than a decade of
delation and sub-par economic growth. The Nikkei index plunges by three-quarters and Tokyo land prices fall by one-
half.
10
Chronology
Iraq invades Kuwait – August 2, 1990 – Iraqi dictator Saddam Hussein invades Kuwait to take control of oil fields,
with likely intention to move on to Saudi Arabia.
“Desert Storm” Gulf War – January 17, 1991
US and coalition forces go to war against Iraq to force Iraq out of Kuwait. US stops short of Baghdad and leave Saddam
Hussein in power.
1990-91 US Recession
US economy is in recession from July 1990 to March 1991 due mainly to the oil price spike around caused by Iraq’s
invasion of Kuwait and the subsequent US-Coalition war against Iraq.
Soviet Union Dissolves – December 26, 1991
The Supreme Soviet, the highest government body of the Soviet Union, dissolves itself and Russia and other republics
later become independent.
11
Chronology
Asian Financial Crisis – July 1997
Run starts on Eat Asian Tiger currencies causing a collapse in the East Asian stock market and an economic recession.
Countries most affect were Thailand, South Korea and the Philippines.
Russian debt default – August 17, 1998
Russia defaults on its foreign sovereign debt and devalues the ruble due to high debt from Soviet era, limited success
with market reforms, high inflation and low currency reserves due in part to spending $6 billion to defend the ruble
during the Asian currency crisis in 1997. The ruble is floated in the wake of the crisis.
LTCM hedge fund bailout – September 1988
Federal Reserve orchestrates a bailout of Long-Term Capital Management hedge fund in order to precent systemic
financial system crisis.
12
Chronology
US stock market hits record high but bubble subsequently bursts – March 2000
The S&P 500, the Nasdaq Composite and other key stock market indices hit record highs in March 2000 but
subsequently enter a bear market.
2001 US Recession – US economy enters recession from March 2001 to November 200 due to bursting of equity
bubble and post-Y2K technology spending burst.
9/11 terrorist attacks on US – September 11, 2001
Al-Qaeda attacks US with aeroplanes crashing into World Trade Centre and the Pentagon. As a result, US enters two
wars (Afghanistan and Iraq) and military spending, along with the US budget deficit, soar.
US invades Afghanistan – October 7, 2001
US invades Afghanistan to oust Taliban government and deny sage haven to Al-Qaeda.
13
Chronology
US launches war against Iraq’s Saddam Hussein – March 20, 2003
US and UK begin “Operation Iraqi Freedom” against Iraq and topple Saddam Hussein who is captured by US forces on
December 13, 2003, and hung after a trail in an Iraqi court.
Avian flu emerges – August 2004
Sporadic outbreaks of avian flu are seen in August-October 2004 in Vietnam and Thailand. Avian flu progressively
spreads into other parts of Asia and then to Africa and Europe by early 2005.
China revalue's Yuan and moves to crawling peg – July 21, 2005
China announces a one-time revaluation in the Yuan by 2.1% and then allows the Yuan to crawl higher in a nod to
international demands that China allow its currency to rise to help curb its soaring trade surplus.
Hurricane Katrina – August 29, 2005
Hurricane Katrina makes landfall near New Orleans and causes widespread devastation including the flooding and
shutdown of New Orleans.
14
Chronology
US officially enters recession in December 2007
In a decision announced a year later in December 2008, the National Bureau of Economic Research declares that a US
recession began in December 2007.
$700 billion TARP bank bailout – October 2, 2008
President Bush signs into law the $700 billion Troubled Asset Relief Program (TARP), which is subsequently used to
inject capital into banks.
Fed announces $800 billion rescue package – October 22, 2009
Barack Obama takes office as the 44th President of the United States , winning the election with his promise of
change.
Obama stimulus plan – February 2009-12-10
Congress approves and the President Obama signs a $787 billion fiscal stimulus bill to revive the US economy.
Source : CRB Encyclopedia of Commodity & Financial Prices Edition 2
Commodities: Past, the Present & the Future
•Since the extremely elevated peaks in real commodity prices of the 1970’s, commodity prices were in general decline (in real terms) until around the turn of this decade.
•Since 2000, however, there has been a reversal of this trend.
•The timing of the rise differs from commodity to commodity, in part a reflection of commodity-specific stories.
•At this early stage of the economic recovery, commodity demand prospects now depend to a large degree on growth in emerging markets (EMs).
•This reflects emerging markets’ steadily increasing rise in global market share, while commodity demand in EMs is more income elastic than in developed economies.
Commodities: Past, the Present & the Future
But there are common elements that have underpinned commodity prices in general:
•The rapid industrialization and income growth in the People’s Republic of China and India (and other emerging markets) meant demand growth outstripped supply growth.
•A sustained decline in the value of the US dollar contributed to the upward pressure on USD-denominated international market prices over the past decade. A weakening USD also fueled increasing flow of speculative funds into commodities, as investors long in US dollars sought to hedge against a loss of value.
•The emergence of commodities as an asset class and the increasing growth of exchange-based and OTC commodity derivative markets (although this is a contentious argument).
17
AGRI COMMODITIES
Agri Commodities
19CORN – Chicago nearby futures
Agri Commodities
20SOYBEANS – Chicago nearby futures
Agri Commodities
21Agri Commodities• Basic food prices rocketed during the 2007-08 spike in commodity prices with
disastrous consequences for poor consumers.
• A number of separate dynamics were at play in driving up food prices, including:
• Rapid industrialization and income growth in the People’s Republic of China
and India underpinned rapid growth in demand which outstripped supply
growth.
• A sustained decline in the value of the US dollar added to the pressure on USD-
denominated international market prices.
• The burgeoning biofuels industry has created another source of demand for
various agri commodities such as corn, sugar and soybeans (“the food vs fuel”
debate). Because of their inter-commodity linkages in both supply and
demand, food prices now have a floor established by their potential conversion
into Biofuel.
Agri Commodities
22Agri Commodities
• Agri commodities are also subject to crop-specific factors that can significantly
impact underlying S&D (extreme weather in growing regions, trade policies etc).
• Although corn, wheat, soybeans and rice prices all hit record high nominal prices
in 2008, it is important to note that in real terms these prices were substantially
below the peaks achieved in 1973-74.
Outlook for selected agri commodities
• Wheat – Global production forecasts for the 2009-10 crop continue to increase
along with a burdensome stocks-to-use ratio. An improving demand picture linked
to a global economic recovery will offer support to prices over the medium term.
We forecast the CBOT wheat price will average US$5.50 over 2010.
Agri Commodities
23Agri Commodities
• Corn – despite a bumper 2009 US crop, Chicago corn prices have been well supported in
recent months by the delayed harvest in combination with a weak US dollar. Improving
global demand and the need for corn to price itself competitively relative to soybeans to
ensure sufficient acreage will offer support to prices in 2010. We forecast the CBOT corn
price will average US$4.10 over 2010.
• Soybeans – the market has been dominated by supply tightness in 2010 after a very
disappointing South American crop last season and robust Chinese demand. After two
straight years of supply deficit, we expect the market to transition into a supply-led
bearish phase in 2010 as global stocks-to-use ratio rises from its lowest level in a
decade. We forecast the CBOT soybean price will average US$9.20 over 2010.
CRUDE & NATURAL GAS
Energies
25CRUDE OIL – WTI nearby futures
Energies
26Crude & Natural Gas
• A weak supply response to a period of strong demand growth was the
fundamental basis for the sharp gains in oil prices in the years leading up to the
2008 peak.
• The seeds of high prices were sown when the depressed oil prices of the 1980’s
and 90’s led to underinvestment which limited the ability of producers to respond
to the strong price signals of the early part of this decade.
• Led by China, strong emerging market demand growth drove OPEC’s spare
production capacity to very low levels.
• The supply response by non-OPEC producers to declining OPEC spare capacity
was only very weak.
• Exacerbating the S&D squeeze, subsidization of fuel in various non-OECD
countries insulated consumers from rising oil prices.
Energies
27Crude & Natural Gas• The global financial crisis, subsequent global economic slump and the flight-to-quality
spike in the US dollar saw crude prices plunge in 2H 2008, falling from a peak of
around $145/bbl in July 2008 to a trough of $35/bbl in Q1 2009.
• As a result of the deterioration in demand and in spite of a number of rounds of OPEC
quota cuts, OECD stockpiles rose to their highest level on record in early 2009.
• Since the lows of Q1 2009, crude prices have rebounded, spot prices averaging $78/bbl
in November.
• The rebound in crude oil prices has reflected improving expectations of a global
economic recovery and a rebound in oil consumption which have offset concerns over
elevated inventory levels.
• Unlike crude, natural gas prices have remained depressed throughout 2009.
• Natural gas prices have remained on the defensive owing to uncertainty about the
extent of recovery in the industrial sector, a warmer than normal start to the US winter
heating season and strong domestic production all of which is reflected in extremely
high inventory levels.
Energies
28Crude & Natural Gas
Outlook for crude oil and natural gas prices
• Crude oil – the outlook for crude prices in 2010 is biased to the upside owing to the
likelihood that a global economic recovery will underpin a recovery in fuel demand.
While the demand outlook for the key US market is uncertain, we expect strong Asian
demand growth to underpin a tighter supply-demand outlook. We forecast the WTI
price will average US$100 a barrel over 2010.
• Natural gas – US inventories remain near their highest level on record. We expect a
persistent supply glut to limit the upside for natural gas prices in 2010. An uncertain
outlook for recovery in demand from the industrial sector, a retrenchment of electric-
power-sector demand for natural gas as well as rising US production will keep prices
depressed. We forecast the natural gas price will average US$6.50 per million Btu over
2010.
METALSMETALS
Metals
30GOLD – COMEX nearby futures
Metals
31SILVER – COMEX nearby futures
Metals
32COPPER - LME nearby futures
Metals
33NICKEL – LME nearby futures
Metals
34Metals• A glance at an historical chart indicates two major spikes in the price of gold; the late
1970’s/early 1980’s and the current rally which began in 2001.
• The recent record-breaking rally (in nominal terms at least) was supported by demand
from institutional investors in response to the uncertain economic outlook and a
depreciation of the US dollar against other currencies.
• Low interest rates, expansionary fiscal policies and quantitative easing (in the US) have
helped avoid Great Depression 2.0 but have sparked growing concern over potential
dollar debasement and price inflation.
• Adding to the downward pressure on the dollar has been the steady improvement in
investor risk appetite.
• As the financial crisis took hold, the dollar temporarily benefited from financial
deleveraging and a spike in risk aversion.
• But as financial markets have returned to more normal conditions, abating risk
aversion added to the downward pressure on the dollar.
• Helping to fuel the latest run-up in gold was a string of official sector purchases.
Metals
35Metals• The Reserve Bank of India’s purchase of 200 tonnes of IMF bullion, made at the prevailing
market price between October 19 to 30, was the largest official central bank purchase since
the mid-1980s.
• Were central banks - relentless sellers of gold since the 1990’s – changing their minds about
the outlook for bullion?
• The symbolism of China, India and Russia all adding to their gold reserves will inevitably be
construed as implying that gold is not just an official asset of the past, but relevant today and
possibly the future.
• Silver’s status as part financial instrument and part industrial metal acted to both support and
cap its price throughout the financial crisis and global recession.
• The gold to silver ratio spiked in late 2008 as silver’s industrial demand prospects collapsed,
but in 2009 the ratio has moved back to pre-crisis levels.
• In recent months silver has not only benefited from a huge increase in investment demand
but also optimism that industrial demand will soon recover.
• The 2009 rebound in base metals’ prices has been supported by strong apparent Chinese
demand as well as anticipation of a global economic recovery.
Energies
36Crude & Natural Gas
Outlook for selected metals markets
• Gold – we expect the gold price to remain high in 2010 as a function of increasing
fabrication demand which will help to offset declining investment demand for gold
amid a recovering global economy. We forecast the gold price will average US$1150
per ounce over 2010.
• Silver – the ‘quasi’ precious metal, silver should outperform gold to the upside in 2010
as a function of its greater exposure to the industrial sector. An increase in industrial
demand will more than offset a decline in investment demand for silver. We forecast
the silver price will average US$19.50 per ounce over 2010.
Energies
37Crude & Natural Gas
Outlook for selected metals markets
• Copper – upward momentum in copper prices should moderate in 2010 however the
market should remain supported by strong domestic growth in the Chinese economy, a
recovery (albeit tepid) in OECD demand and limited spare production capacity. We
forecast the copper price to average US$7500 per metric ton over 2010.
• Nickel – the outlook for nickel prices is one of the weaker of the industrial metals.
Excess production capacity will dampen the influence of rising global demand. We
expect the nickel price to average US$17800 per metric ton over 2010.
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