The oddities of commodities

Account executive Brad Waring of James Brearley and Sons

Account executive Brad Waring of James Brearley and Sons

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It appears that the commodity super cycle is at an end.

On some measures European Basic Material investments have hit multi-year lows. The last time they were this low was at the end of 2008, when it was considered that the world economy was on the edge of a significant global downturn.

Today, few would believe that this is still the case. In fact, there are signs of growth in most developed economies with the International Monetary Fund predicting global growth of 3.3 per cent for 2013.

What has changed though since 2008 is the significant rise in prices of most commodities. Since this time the laws of supply and demand have come into play, with many mining companies not just extracting more from existing mines, but also by opening new ones. Thus supply has increased to meet demand especially from the emerging economies. With the time lag in getting these projects up and running, the supply increase is now coming through; so exerting downward pressure on commodity prices.

A major reason for the demand slow down is the Chinese economy, even though it is still growing fast when compared to most developed economies. As a result, producers are now cutting back output.

Historically commodity gains have been an indication of global growth, so this slowdown in demand could be an indication that investors doubt such forecasts. Alternatively, it could mean the sector is undervalued.

“Investing in stockmarket based investments may not be right for all investors. Consider carefully and/or seek professional guidance before investing.’’ Contact James Brearley & Sons on (01253) 831250 or blackpool@jbrearley.co.uk.

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