Commodity Supply May Be Curbed by Crisis, Goldman JBWere Says

By Jae Hur

Sept. 24 (Bloomberg) -- Commodity prices will stay ``stronger for longer'' as financing becomes a real constraint on supply growth because of the global credit turmoil, Goldman Sachs JBWere Pty said.

``Credit restrictions and volatile equity markets have implications for the supply side,'' the Melbourne-based firm said in a report. ``Junior companies wishing to finance greenfield projects that would have had little difficulty in raising either debt or equity 18 months ago, would likely struggle today.''

Raw material prices, as measured by the Standard & Poor's GSCI index, have climbed 12 percent since Sept. 16 as the dollar dropped on concern the U.S. government's $700 billion plan to buy bad mortgage debts would erode confidence in the currency. Gold, a traditional haven in times of financial crisis, has gained 13 percent.

``Longer term, we believe the structural bull market endures, based on supply and demand fundamentals,'' Goldman Sachs JBWere said. ``The theme of industrialization and urbanization in emerging markets has not disappeared. Neither have the supply constraints for certain commodities been sustainably alleviated.''

In China, ``growth rates have been slowing for some time, but fears of a collapse in demand for raw materials post- Olympics are unfounded,'' it said.

``We expect sentiment to improve as a cleaner read on the Chinese economy becomes available during the fourth quarter of 2008, and that the outcome in China will be considerably stronger than the market currently seems to fear,'' it said.

Credit Curbs

For the medium-term, credit restrictions will put pressure on demand for raw materials.

``The housing market collapse in the U.S. has already taken a large and obvious toll on demand for raw materials,'' as well as the weaker outlook for automotive sales in many parts of the world, the firm said.

In the short-term, tighter credit availability and higher financing costs have restricted the activities of commodities traders in the physical and derivatives markets with de-risking and switching of counterparties, it said.

``The dollar has become the key short-term price driver, not just for gold, but for all exchange-traded commodities,'' it said. Short-term speculative money has moved neutral for oil or net-short for base metals, it said.

To contact the reporter on this story: Jae Hur in Singapore at jhur1@bloomberg.net