Metals Commentary: CPM Group sees commodities recovering in 2009

New York City-based CPM Group is looking beyond the crashing commodities market to a point where a sharp recovery could begin. The consultancy believes that the smoke hanging over the market will clear within the next six months, and this will help clarify the direction that the market will take for the next two to five years.

Currently, the market is plagued by uncertainty about demand, the financing of future supply, and global economic and political conditions. CPM believes that by April, trends driving commodities market fundamentals will have become apparent, including fabrication demand, investment demand and supply.

Fabrication demand has been weakening recently. By April, there may be signs that the U. S. and global economies are bottoming out and moving toward recovery. CPM is bullish on that phase, saying that demand for many commodities, including base metals and energy, could hold up at better than expected levels, so it is likely to recover forcefully. This is because demand has been dampened by recession and deferred, but not destroyed.

Demand for commodities will be robust because demand for final goods and services will remain strong globally in the long run. Underlying this demand is the worldwide move toward modernization and greater consumption of housing, autos, consumer durables and services. This trend is stronger on a long-term basis, beyond the next few quarters, than the present consensus market view. In other words, fabrication demand is more durable than currently widely believed.

Turning to investment demand, CPM acknowledges that many commodity investors have cashed out and are sitting on the sidelines. However, investment demand has not entirely disappeared, and eventually commodity investors will return to the market.

Turning to the supply side, CPM sees the constraints of low prices and a dearth of project financing. The supply side has responded slowly in recent years to higher commodity prices and demand. It will be even slower now that financing for many projects has dried up. Eventually, financing will become available again, but it will be more expensive and harder to obtain, slowing down supply response and maintaining tight supply-demand balances.

CPM cites forecasts by economists that the recession will last two to three quarters, into the second quarter of 2009, with recovery starting in the second half of 2009. Although confidence is not seen as returning to financial markets by April, the financial rescue measures by governments should bear fruit by then.

Political uncertainty also affects markets, and CPM believes that the next six months will resolve a number of political issues weighing on markets, including the new U. S. administration and its economic policy and direction, and the situation in the Middle East.

Political conditions in Russia and former Soviet republics became unsettled this year, and by the second quarter of 2009 it will become more apparent where things are headed. There are other countries where political conditions are fluid, such as Pakistan, China, North Korea and Venezuela, and CPM anticipates that conditions in many of these countries will become more settled over the next six months. This will increase predictability and allow more confident investment decisions.

The conclusion that CPM draws is that, although timing remains uncertain, the commodities market will eventually rebound, and when it does, the change in sentiment could be rapid, particularly for base metals and energy. This is because there is a lot of money sitting on the sidelines, and it will be deployed once owners’ confidence is restored.

However, not all economists agree that the recession will last only six to nine months. For example, National Bank economists believe that the recession could last 12-15 months, postponing the recovery to late 2009 or early 2010.