Oil, Copper May Jump, Deutsche Bank’s Grenfell Says

(Bloomberg) -- Commodities from oil to copper are poised to climb as government spending worldwide spurs a recovery in demand and companies curtail investment in mines and rigs, said Deutsche Bank AG’s Simon Grenfell. “We’re building up to have a really strong price move” over the next two years, Grenfell, head of Asian commodities for Germany’s biggest lender, said in an interview yesterday in Singapore. The risk of a “super-spike” has increased, he said, expressing his own opinion.

Commodities jumped 15 percent this year after slumping 36 percent in 2008, their biggest decline in half a century based on the Reuters/Jefferies CRB Index, because of the global recession. This year, gasoline and copper doubled on signs the worst is past for the economy and as China increased inventories of crude oil and industrial metals. The world economy will grow 2.5 percent in 2010, more than the 1.9 percent forecast in April, after shrinking 1.4 percent this year, according to the International Monetary Fund. China expanded 7.9 percent in the second quarter, the first time growth had accelerated in more than two years.

“The only area of the world economy I know where the fundamentals are getting better is commodities,” investor Jim Rogers, chairman of Singapore-based Rogers Holdings, said in an interview. Commodity assets under management climbed by the second-largest amount in the second quarter, gaining $34 billion to $209 billion, Barclays Capital said in a report Aug. 5.

Grenfell said demand for commodities will remain “very strong” as investors from sovereign wealth and pension funds to asset managers increase their holdings.

Price Risks
Crude oil advanced 60 percent this year to $71.23 a barrel on the New York Mercantile Exchange. The London Metal Exchange index of six metals soared 67 percent to 2,880 as countries worldwide spent more than $2 trillion to spur their economies. The risks to commodities continue to be falling house prices “that may dent demand in the West,” Grenfell said. Buying by China, the biggest consumer of commodities, may slow because of this year’s price gains, he said. “There is still a lot of uncertainty out there. Volatility will remain high.”

David Moore, commodity analyst with Commonwealth Bank of Australia, said “sentiment” is driving commodities. “People want exposure to the economic recovery,” he said yesterday. Still, “the recovery is hesitant and data will disappoint.” He expects a pull-back in metal prices in three to six months. A shortage of raw materials is likely next year as output of metals and agricultural products potentially climbs too slowly to keep pace with demand, Goldman Sachs Group Inc. said.

2008 Redux
“We expect a redux of 2008, when severe supply constraints forced the rationing of demand through sharply higher prices to keep markets balanced,” New York-based analysts Anthony Carpet, Laura Conigliaro and Robert Boroujerdi said in a report Aug. 5. Prices of crude oil, copper, corn, soybeans and wheat reached records last year before tumbling in the second half.

The worst housing market since the 1930s has shown signs of stabilizing as a gauge of U.S. home prices posted its first monthly gain in three years in May from the prior month. Even so, Americans may boost savings and limit spending as unemployment climbs, restraining an economic recovery. Government stockpiling, a drop in the dollar and inflation may boost commodity prices, Grenfell said. China’s State Reserve Bureau contracted to buy 300,000 tons to 400,000 tons of copper, according to Sydney-based Macquarie Group Ltd. Vietnam plans to build inventories for oil and fuels to stabilize prices, the government said this week.

Grenfell, who has worked in commodities for about 17 years, said the markets poised to appreciate are energy, copper, nickel, platinum and palladium. “Green” credentials may spur demand for platinum and palladium, which are used to clean toxic car exhausts, he said. Metals demand from auto parts makers may be recovering. Ford Motor Co., the second-largest U.S. automaker, posted its first sales gain since 2007 in July as industry-wide sales rose to an 11.2 million annual pace in the U.S. last month, the highest rate for the year.