Commodities Signal Bubble Bursting as First-Half Ends

By Millie Munshi and Claudia Carpenter

June 30 (Bloomberg) -- Commodities finished their best first half in 35 years. The next six months may not be as rewarding because record prices for oil, copper and a dozen other raw materials may crimp consumption and encourage growth in supply.

The 19 commodities in the Reuters/Jefferies CRB Index jumped 29 percent through June 30, the most since 1973 and more than any second-half gain in at least five decades, data compiled by Bloomberg show.

High costs are slowing the pace of demand for gasoline in the U.S., and gold purchases in India, the biggest buyer, plunged 50 percent from a year earlier. Producers are expanding supplies of wheat in the U.S. and steel in China.

``We're near some kind of reckoning'' in commodities, said Michael Aronstein, president of Marketfield Asset Management in New York, who returned 15 percent a year in the 1990s managing commodity investments. ``I've probably been positive for seven years and this is the first time I think there could be really a dramatic secular reversal, that it's not just a pullback.''

High energy costs will deter consumers and reduce second- half prices, after oil doubled in the past year to a record $143.67 a barrel today, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd.

Jet-Fuel Costs

In the U.S., the world's largest energy user, the number of travelers over the Fourth of July holiday will drop for the first time this decade, after gasoline rose above $4 a gallon, motoring group AAA said June 26. Surging jet-fuel costs led to the failure of at least a dozen airlines in the past six months, grounding planes.

Demand is slowing for copper after the metal jumped 28 percent this year and reached $4.2605 a pound May 5, the highest ever, partly because of temporary supply disruptions in Chile, Peru and Mexico. China said June 10 its copper imports fell 19 percent last month to the lowest since August. Buyers in China, the world's biggest metals importer, are ``price sensitive,'' according to Freeport-McMoRan Copper & Gold Inc., the world's second-largest producer.

Gold demand from jewelers, the biggest users, has stalled since September, London-based UBS AG analyst John Reade said May 29. After reaching a record $1,033.90 an ounce March 17, gold will average $850 this year and $750 next year, he said. The World Gold Council said May 20 that first-quarter demand fell to a five-year low.

Rising Output

Price gains that curb demand are encouraging producers.

Katanga Mining Ltd. restarted the largest underground copper mine in the Democratic Republic of Congo. The Lisbon- based International Copper Study Group on April 28 forecast a supply surplus this year and next.

The world's wheat farmers will boost production by 8.2 percent to 658 million metric tons in the next 12 months, the International Grains Council said June 26. Wheat jumped to its highest price ever in February.

Output is gaining as economic growth slows.

The odds of the U.S. entering a recession in the next 12 months are 50 percent, according to the median forecast of 61 economists in a Bloomberg survey. Slowing global growth signals commodity demand will ``soften,'' the International Monetary Fund said in March. During the last U.S. recession in 2001, the CRB index plunged 16 percent.

`Buying Orgy'

Commodities advanced this year during a ``buying orgy'' by investors seeking better returns than stocks and bonds, Paul Touradji, founder of the $3.5 billion hedge fund Touradji Capital Management, said in March.

The UBS Bloomberg CMCI Index of 26 commodities rose 31 percent this year, touching a record today. Equity markets trailed behind, as the Standard & Poor's 500 Index dropped 13 percent. U.S. Treasuries returned 2.1 percent.

Indexes linked to commodities took in an unprecedented $235 billion as of mid-April, according to Lehman Brothers Holdings Inc.

The expansion is now slowing. Second-quarter net inflows into European exchange-traded products linked to commodities fell about 58 percent to $800 million from the previous quarter, Barclays Capital said.

The prospect of increased regulation also may make investing in raw materials less attractive, said Dennis Gartman, whose $250 million fund in commodities, stocks and bonds climbed about 30 percent since April 2007. The House of Representatives approved on June 26 a measure requiring the Commodity Futures Trading Commission to use its emergency authority to curb excessive speculation in energy.

Dollar Rally

Investors also may shift away from commodities as an alternative to dollar-denominated assets. The U.S. currency will end a two-year slide and advance in the second half, according to forecasts compiled by Bloomberg.

Lower prices would ease social tensions. The World Bank warned that 33 countries from Mexico to Yemen faced unrest because of higher commodity costs. The Egyptian government now spends about 5.5 percent of the national budget on bread subsidies and people were killed during food riots.

Some commodities may keep rallying.

Floods across Iowa, the largest corn-growing state, and in Illinois and Missouri threaten to cut corn and soybean plantings.

Seeding More Acres

U.S. farmers seeded more acres with corn than they indicated in March as prices rose to a record and they reduced soybean acres as the worst flooding in 15 years interfered with late-seeding plans, the U.S. Department of Agriculture said today. A more extensive assessment of any flood damage will be included in the Aug. 12 crop production report.

Jim Rogers, who in April 2006 correctly predicted oil would reach $100 and gold $1,000, said investors should steer clear of the dollar and favor commodities.

``Agricultural prices have much higher to go over the next decade,'' Rogers said in a speech in Shanghai today. ``We have a shortage of everything, including seeds.''

To contact the reporters on this story: Millie Munshi in New York at mmunshi@bloomberg.net; Claudia Carpenter in London at ccarpenter2@bloomberg.net.
Last Updated: June 30, 2008 18:32 EDT