Chinese demand will help recovery
Commodity Crash

John Greenwood, Financial Post
Published: Tuesday, October 07, 2008

The market cliche for drops like yesterday's is "don't try to catch a falling knife." Yet experience tells us that markets are cyclical and the biggest gains are often scored when least expected.

According to BMO Nestbitt Burns commodity analyst Bart Melek, the smart money is looking at the current market turmoil as a buying opportunity.

"I think the fundamentals [of the global economy] remain quite healthy. The important thing is that China will continue to grow," Mr. Melek said in an interview.

"Once the West settles, the strong demand from the developing world will again start to strain the supply side and we might again have quite a robust rally -- probably in the second quarter, maybe even earlier."

Prices of many commodities have already fallen below the marginal cost of production for some companies. At the first opportunity those players will push up prices to a more acceptable level.

In a report yesterday, Mr. Melek advised clients that world iron ore demand will continue to increase in 2008, staying "extremely strong" into 2011.

Yesterday Deutsche Bank said in a report that the current downturn is the worst since 2001 as a broad swath of commodities were hit by a market sell-off.

Oil prices slipped below US$90 a barrel, the lowest since the start of the year. Copper on the London Metals Exchange fell 7.2% to $5,575 a tonne, back to where it was in February, 2007.

Jeff Rubin, chief economist at CIBC World Markets, agrees that the world is in a cyclical recession.

"I will point out that if oil is at US$90 in a recession, it begs the question of where its going to be in a recovery," he said. "And I think it's US$150 --US$250 in a recovery."

"I would argue that not just oil prices but most commodity prices have already discounted a deep global recession," he said.

Experts such as Mr. Rubin argue that the credit crunch that sparked the commodity sell-off is a structural problem that does not impact the longterm market fundamentals of global supply and demand.

Among the biggest victims of the carnage are agricultural commodities such as wheat and corn. According to Bill Gary, president of Commodity Information Systems in Oklahoma City, Okla., grain prices will settle back to the same level they were at before the agricultural boom, a huge problem for producers who for the last few years have been swallowing steep increases in fertilizer and tractor fuel.

"I've been in this business since 1961 and I've never seen anything like this," Mr. Gary said. "We are not going to come out of this easy. This [credit crisis] is not something we've ever seen before."

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