|
Commodities: Hot or not?
|
 |
July 14, 1999: 7:12 a.m. ET
Analysts disagree about whether price slump is really over
By Staff Writer Shelly K. Schwartz
|
NEW YORK (CNNfn) - The recent rally in energy stocks, coupled with a bounce in base metal and oil prices, has fueled speculation that the black clouds lingering over the commodities market may finally be lifting.
But if you're looking for direction from the experts on what lies ahead for the high-risk investment sector, you're out of luck.
Some say we've turned a corner. Others maintain that the factors which have crippled energy and agriculture prices for the past two years remain in effect, and they add there's not much hope for a lasting recovery.
"This is the worst commodities bear market I've ever experienced, even counting the [downturn in the late 1980s]" said Bill O'Grady, vice president of fundamentals futures research for A.G. Edwards. "It's not good. It really isn't and it doesn't look like there's any end in sight."
A slick ride
So far this year, the S&P energy index shows stock prices for oil and natural gas companies involved in exploration and production have climbed an average of 33.6 percent, while shares of drilling and equipment firms have rocketed 52.5 percent.
In individual issues, shares of Atlantic Richfield Co. (ARC) are up to $92 per share from $55 in January, while Murphy Oil Corp. (MUR) is up to $50 from $35 and Chevron (CHV) shares have climbed to $100 from $77. Shares of Texaco (TX) are also up at around $65 per share from $48 in January, and petroleum giant Mobil (MOB) has risen to more than $100 per share from $82. Royal Dutch Petroleum (RD) is up to $63 from $40.
The commodities market has been under pressure since the Asian economic crisis began two years ago, upsetting the balance of supply and demand. A global glut of energy and agricultural products, combined with waning demand, sent prices on a downward spiral.
Economists now say they see signs of recovery in Asia, but O'Grady said those countries are still a long way off from declaring stability -- and that won't be enough to reinvigorate the commodities market anytime soon.
"You have to have the world start doing better (before commodities prices correct), and the Asian crisis is starting to look a lot like what Latin America went through in the 1980s," O'Grady said. "It took them almost a decade to get their problems fixed."
In March, the Organization of the Petroleum Exporting Countries (OPEC) announced a deal to limit exports and cut production to bring sky-high supply levels back in line with market demand. That helped lift the price of oil by the barrel above the $15 mark for the first time in five months.
The price of oil Tuesday closed above $20 a barrel for the first time in 20 months, propelled by rumors that Saudi Arabia has pledged to maintain petroleum production cuts through September.
Metals
Major base metals traded on the London Metal Exchange have also enjoyed a short-term spurt. Prices last week surged as investment fund money flowed into the sector. Copper and zinc hit one-year highs, aluminum rose to its highest level in 14 months, and nickel reached an 18-month peak.
Traders told Reuters they believe speculative money moving into the metals markets is coming from major investment interests such as macro funds, which have detected a sea change in sentiment and direction. If so, they said, there's no reason to believe the recent gains will be erased.
Earlier this month, mining analyst Thomas Van Leeuwen of Credit Suisse First Boston raised his ratings to "buy" from "hold" on four copper companies: Asarco Inc., Freeport-McMoRan, Phelps Dodge, and Southern Peru.
At the same time, an analyst with Morgan Stanley Dean Witter raised his price targets on several European mining companies, maintaining an "outperform" rating on the group.
The companies were: Rio Tinto PLC (RIO), Billiton PLC (BLT), Pechiney (PECH) and Outokumpo (OUTAS).
Wayne Atwell, a domestic metals analyst and managing director for Morgan Stanley Dean Witter, said he shares his colleagues' more optimistic outlook for commodities.
"I would say we made a long-term secular low in commodities," he said. "The Asian crisis really took the wind out of the sails of these commodities, but across the board, I believe metals have hit bottom."
He added the "general tone of the market is better" and said there is a general feeling that Asia has bottomed out.
"It looks like it's going to be a better pricing environment for [metals for] the next three or four years," Atwell said, especially for aluminum.
He cautioned, however, that the recent run-up in copper - up nearly 30 percent since late May -- may be overextended.
For the last decade, copper has enjoyed a healthy price environment, but only because many companies cut back on production. As prices creep back up, Atwell said those companies are likely to bring idle capacity back online.
"I would say copper is a bit ahead of itself," he said. "It's experiencing sort of a temporary run that will probably be followed by increased capacity and a correction in prices."
O'Grady, of A.G. Edwards, agreed.
"Copper has made a nice run, but that's a pretty thin reed to run a bull market on," he said.
Aluminum, on the other hand, paints a different picture and may be positioning itself to leave a decade of difficulty in the dust.
Consumption levels of the metal fell off dramatically with the collapse of the Soviet Union, and falling prices since then have forced many participants out of the market. Now, as demand picks up, the handful of competitors is expected to enjoy a healthy long-term growth cycle.
"I think the aluminum story is for real," Atwell said. "Inventories are at fairly attractive levels. I would say aluminum is really the metal in the best shape."
Aluminum Company of America, or Alcoa (AA), which declared a two-for-one stock split in January, has watched its stock soar to more than $60 a share, up from $40 at the time of the split. Shares of rival Reynolds Metals Co. (RLM) have climbed to about $61 a share, up from $45 in January.
The growing season
Most analysts seem to agree that whatever gains befall the metal, mining and energy sectors won't be shared by farmers.
Daniel Basse, a commodities analyst with AgResource.Basse, said U.S. farmers still have large inventories of grain to sell, demand remains low, and so far crop yields in the field are healthy.
The same is true for wheat, soybean and corn producers in Latin America and Europe.
"Farmers are clinging tight to large old crop supplies (waiting for the price to climb), but when both crops are on the market sometime this fall prices may go even lower," Basse said. "Soybeans could easily drop below $4 and that would be the lowest price since 1971."
Today, they are selling for about $4.24.
"This is a structural problem that may take several years to solve," Basse said. "Unless the U.S. government steps in, or Mother Nature helps us out with a calamity (that would reduce the global supply of grains), we are looking for prices to maintain historically low levels for another few crop seasons."
O'Grady, of A.G. Edwards, said many voters would like Uncle Sam to step in and establish a set aside program that would pay farmers for cutting back on production.
But he said that's not good policy. For one thing, Latin American producers could merely view the cutbacks as an opportunity to produce more. Moreover, he said, farmers would simply take the least productive portion of their land out of production, doing little to lower inventories.
"This is an election year and we're already deep into the silly season," O'Grady said. "The government has to figure out what it wants to do."
Investor advice
Despite the volatility that comes with the commodity market, however, some analysts say investors with a flair for speculative trading could do well on the futures floor.
Commodities, they say, are a good way to diversify your portfolio, and they are among the only investment vehicles not directly or indirectly tied to equity market performance.
"As long as you have trending markets, whether they are up or down, commodities are a good place to be," O'Grady said.
Those who lack the intestinal fortitude, however, could park their dollars in one of the mutual funds that invest in commodities.
Among the 60 some odd mutual funds that invest in natural resources, the most widely held commodity holdings are Mobil (MOB), Schlumberger LTD (SLB), Halliburton (HAL), Exxon (XON) and BP Amoco (BPA).
So far this year, performance of the three largest natural resource mutual funds has been strong.
Through the second quarter, T. Rowe Price New Era fund was up 20.48 percent, Vanguard Energy fund was up 24.82 percent and Fidelity Select Energy Service fund was up 53.77 percent.
By comparison, the benchmark Goldman Sachs Commodities Index was up 17.35 percent for the same period, according to Morningstar.
If you're looking to diversify your equity holdings further, there are also a number of commodity trading advisors, or CTAs, out there, including John W. Henry & Co.
The Boca Raton, Fla.-based firm manages a total of $2.3 billion and offers three funds with commodities exposure. They are the Original Investment Program, Global Diversified Portfolio, and the JWH GlobalAnalytics Family of Programs.
Verne Sedlacek, president and chief operating officer John W. Henry & Co., said the funds' level of commodity exposure varies depending on economic factors. The funds invest primarily in the global liquid markets, including interest rates, international exchange and the agricultural, metals and energy sectors.
"Our funds provide excellent diversification," Sedlacek said. "Historically, we have performed very well when the stock market has not done well."
Since inception, the Original fund has returned 16.49 percent, while the Global fund returned 22.55 percent and the JWH fund returned 22.54 percent.
And in individual stocks, don't forget aluminum.
"Aluminum is looking quite attractive," Atwell said. "Aluminum looks like it's already tightened up and the shares haven't really responded as I think they should."
--Reuters contributed to this report
|
|
|
|
|
 |
|
