Rally in world commodity prices not over yet: Analysts

Rally in world commodity prices not over yet: Analysts

LONDON (Reuter): World commodity prices, spurred to their
highest levels for years by tighter supplies and a massive inflow
of "hot" money from investment funds, show few signs of running
out of steam, analysts say.

"The run-up in prices still has some way to go, especially in
the more demand-related commodities like metals," said one senior
London-based commodities analyst.

Growing economic recovery in Western Europe and Japan should
keep commodity prices bubbling along, he said, adding that
inflationary pressures would stay muted this year.

Among the star performers, coffee is near eight-and-a-half year
highs after two frosts ravaged plantations in Brazil, the world's
biggest producer. Coffee traded on the London Commodities
Exchange has gained 326 percent from last year's lows.

On the London Metals Exchange, aluminum has risen 41 percent,
copper by 50 percent, platinum by 23 percent and tin by 21
percent from their 1993 trough.

A host of other commodities, from palm oil to Australian wool,
have notched up similar steep gains, though analysts noted they
had all risen from historically depressed levels caused by over-
production and large stockpiles.

Some commodities like coffee have already peaked, while
others, including cocoa, lead and aluminum, should see further
rises, said Lawrence Eagles, analyst at brokers GNI Ltd.

One of the few dull spots is world grain prices which have
fallen on more favorable weather for developing crops in North
America.

Analysts said world economic growth was set to accelerate, but
added that many commodity prices, notably some base metals, had
already risen in anticipation of the upturn and so further big
gains could be discounted.

Estimation

Some commodities may start falling if world growth fails to
match expectations or if there is no big dent in stockpiles,
GNI's Eagles said.

The key indicator for investors wary about a resurgence in
inflation is the price of Brent crude oil, analysts said.

Buoyant demand in the United States, the world's largest oil
consumer, and OPEC quota adherence has boosted oil prices to
their highest levels in more than a year. However, analysts said
they were relaxed about inflation prospects while Brent crude
fetched less than US$22 a barrel. Yesterday it was trading at
just over $18 a barrel.

Commodities represent only 10 percent or less of total
production costs, one noted. Wage rates, rather than raw material
prices, are the critical factor where inflation is concerned,
said Alec Gordon, the editor of the Economist Intelligence Unit's
World Commodity Forecasts.

Although booming commodity markets are hardly a new
phenomenon, a striking feature of this bull run has been the key
role played by the big investment funds, Gordon said.

This year huge amounts of fund money have switched out of
cooling equity and bond markets into commodities as investors
seek to hedge against a possible inflationary resurgence.

Despite some funds moving back into financial markets in
recent weeks, analysts said commodities had become an important
part of discerning investors' portfolios and would remain so.

In addition to the world business cycle and the interest of
the big funds, analysts said structural changes in demand were
also helping to fuel the current commodity price boom.

As vast populations of countries like China and India get
wealthier so they buy more, turning them into net importers of
some commodities which they used to be key suppliers of to the
rest of the world.