Commodities Hint of Bottom on Mine Closings, Supplies

By Madelene Pearson

Aug. 25 (Bloomberg) -- Corn and soybeans have rebounded as reduced crop yields push U.S. stockpiles to near five-year lows. Oil has reversed on U.S.-Russian tensions. Nickel has turned after Xstrata Plc closed a Dominican Republic plant.

The worst rout in the history of commodities may be ending, signaling a replay of the 2006 tumble that preceded a doubling of prices in the next 17 months as measured by the Standard & Poor's GSCI index. Only this time, the driver is supply cuts rather than increasing demand.

Supply constraints are ``coming more and more to the fore'' and that ``will separate the performance of individual commodities,'' said Alan Heap, global commodity analyst at Citigroup Inc. in Sydney. ``We're still looking for higher prices next year and in some cases the year after.''

Commodities are in their seventh year of gains, fueled by demand led by China and India and disruptions to mine and farm supplies. A rebound in raw materials from four-month lows may boost profits at BHP Billiton Ltd., raise costs at Nestle SA and stoke inflation, limiting the ability of central bankers Ben S. Bernanke and Jean-Claude Trichet to cut interest rates and revive growth in the U.S. and Europe.

Oil is up 3 percent from a more-than-three month low after gaining 10 percent on concern supply may be disrupted by tension between Russia and the U.S. over Georgia and Poland's missile shield. OPEC may consider output cuts at its Sept. 9 meeting, Venezuela Energy and Oil Minister Rafael Ramirez has said, and U.S. gasoline stockpiles are dropping. Oil ended at $114.59 a barrel Aug. 22, down 22 percent from its record $147.27 July 11, and traded at $114.84 today.

Rogers on Oil

Investor Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said Aug. 23 that crude oil prices will climb.

``Over the course of time, it's a bull market,'' Rogers, 65, chairman of Rogers Holdings, said after an investor conference in Kuala Lumpur. While oil could fall to $75 or rise to $175, prices will appreciate during the next 10 years, he said.

Copper, after plunging as much as 20 percent from its $8,940 a ton record on July 2, has rebounded from a six-month low as output fell at BHP Billiton, the world's biggest mining company, and Chile's Codelco, the largest producer. Aluminum may gain as power shortages force producers in China to curtail output, said Barclays Capital, the securities unit of London- based Barclays Plc.

Xstrata, the fourth-largest nickel refiner, said Aug. 19 the suspension of its Falcondo operations in the Dominican Republic may last four months. The operations produce 29,000 tons of nickel a year, or about 2 percent of world primary nickel production.

`Still Intact'

Corn and soybeans, down as much as 37 percent from their peaks, gained the past two weeks as delayed plantings threaten to reduce U.S. yields and on concern export tax protests may disrupt supplies from Argentina, the second-largest exporter of corn and third-largest of soybeans. That would strain world cereal stockpiles that the United Nations' Food and Agriculture Organization says are near a 30-year low.

``I don't think the commodity boom has ended at all,'' Malcolm Southwood, a Melbourne-based commodities analyst with Goldman Sachs JBWere Pty, said Aug. 21. ``We've got a little bit of a cyclical downturn in a longer-term bull market, and the structural fundamentals are very much intact.''

Commodities, as measured by the Standard & Poor's GSCI index of 24 raw materials, had their fastest 30-day decline to Aug. 15, slumping 21 percent, after peaking July 3.

The California Public Employees' Retirement System, the largest U.S. pension fund, remains committed. Calpers, which oversees $239 billion, said in February it may raise commodity investments 16-fold to $7.2 billion through 2010.

Calpers Not Concerned

``We're in for the long term,'' Clark McKinley, a spokesman for Sacramento, California-based Calpers, said this month. ``Short-term market moves are not of great importance to us.''

Supply constraints come at a time of sustained demand in China and India, home to a third of the world's population.

China may spend as much as 400 billion yuan ($58 billion) to stimulate the economy and ease monetary policy, said Frank Gong, head of China research at JPMorgan Chase & Co.

The nation's factory and property spending accelerated through July, fueled by rebuilding after the Sichuan earthquake, the statistics bureau said Aug. 15. Exports surged and retail- sales growth was the most since 1999. Chinese demand may also increase as factories shuttered for the Olympics reopen. The economy expanded 10.1 percent in the three months through June.

India, which could emulate China in demand for raw materials, will grow 7.7 percent in the year to March, a government panel said Aug. 13.

Some Skeptical

Not all investors are so optimistic.

``The whole cycle that began around the turn of this century ended,'' said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc. in New York, who returned 15 percent a year in the 1990s managing commodity investments. ``Human ingenuity creates productivity, and the real price of almost everything that's extracted or manufactured goes down over time. That's the nature of human progress.''

Federal Reserve Chairman Bernanke signaled last week that the central bank expects the commodity rally to ease. The Fed is keeping its target for interest rates ``relatively low'' because of ``our expectation that the prices of oil and other commodities would ultimately stabilize, in part as a result of slowing global growth,'' Bernanke said Aug. 22 at the Kansas City Fed annual conference in Jackson Hole, Wyoming.

`Weakening Economy'

``We've seen the end to the upward trend'' for commodities, Nicholas Sargen, chief investment officer of Fort Washington Investment Advisors Inc. in Cincinnati, said in a Bloomberg Radio interview Aug. 22. ``The global economy is weakening, not just the U.S. economy. All the evidence coming out of Europe is that the economy now is stagnating. Japan and parts of Asia are weakening as well. That's just too powerful to be overcome.''

Countries that make up half the world's economy face a recession, Goldman Sachs Group Inc. said Aug. 21. The U.S., Japan, the 15-nation euro area and the U.K. are ``either in recession or face significant recession risks in the months ahead,'' Goldman's London-based international economist Binit Patel said in a report.

A year since the U.S. housing slump sparked about $500 billion in credit market losses for banks globally, the world's largest economies are now stumbling as rising borrowing costs combine with high commodity prices.

To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net