Commodity Investor Demand May Wane on Economy, Allianz Says

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25 Feb 2010

Investment demand for commodities, especially metals, may wane in the next three months because of concerns that the global economic recovery may be slower than expected, according to Allianz Investment Management. “There could be a lot of unwinding” of bets that raw materials will advance, Nikhil Srinivasan, who oversees about $30 billion of assets as chief investment officer for Asia and the Middle East, said in an interview yesterday. “That will keep them from having a strong year.”
Commodity prices have dropped 1.1 percent since the start of January as China, the biggest user of raw materials, took steps to curb record lending and Greece’s budget crisis shook confidence in Europe, pushing the dollar higher. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. economy still needed low interest rates to encourage demand by consumers.
“I think commodity markets will be range-bound like equity markets in the next two to three months,” Singapore-based Srinivasan said. “I find it hard to believe that commodities will break out of their last highs.” Allianz has “marginal” direct exposure to commodities and mainly invests through commodity stocks, he said, declining to elaborate.
Commodity assets under management fell by $12 billion last month to $245 billion, the first decline in more than a year, Barclays Capital said this week. Investment inflows of $139 million were down more than $5 billion in both monthly and yearly terms, the bank said.
China Demand
Raw materials, as measured by the Standard & Poor’s GSCI Index of 24 futures, jumped 50 percent last year, posting their best year since at least 1971, as governments pledged as much as $12 trillion to combat the worst recession in seven decades.
“My sense is that any move up in commodities will have to be driven by confidence on China demand and whether it will be sustainable like last year,” he said. “Industrial commodities won’t be as good as last year.”
Copper for three-month delivery is down 2.7 percent this year, even after rallying to $7,796 a ton on Jan. 7, the highest level since August 2008. The metal traded at $7,175 a ton today in Singapore.
A possible slowing in the Chinese economy and the outlook for U.S. demand pose the biggest risk for commodities, he said. Sales of new homes in the U.S. unexpectedly dropped in January to the lowest level on record, according to Commerce Department figures. Copper imports by China, the largest consumer, fell for the first time in three months in January, customs data showed.
“Commodity markets are uncertain right now about where they are going to go,” Srinivasan said. The outlook for gold was positive because of growing fiscal concerns in European nations, he said. “Gold is more interesting given that the sovereign risk issue isn’t going to go away.”
Gold for immediate delivery is little changed this year at $1,094.69 an ounce.

Source: Bloomberg