Tags: commodities | boom | bust | China

MarketWatch: Commodities May Boom Then Bust

By Michelle Smith   |   Tuesday, 29 Jan 2013 11:59 AM

Commodity investors should not fall asleep at the wheel, as 2013 may be a year that raw materials experience a boom before a bust, warns MarketWatch.

China and the Federal Reserve may be the most important forces for raw materials this year. And if 2013 proves to be a year of two halves for commodity markets, MarketWatch says these two parties will likely bear the blame.

China has a super-sized appetite for raw materials, and recent data suggest that economic conditions are improving. The nation reported an uptick in economic growth for the fourth quarter of 2012, an acceleration in retail sales for December and an improvement in manufacturing, according to The Associated Press.

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The government has also announced an infrastructure program that should bolster its demand for raw materials.

Given the developments, China is expected be a major driver in a commodities boom in the first half of 2013. But the nation could also be cause for caution in the second half, as some are skeptical that its demand for raw goods will hold up, according to MarketWatch.

Economic growth in China has been declining for two years and analysts urge investors to avoid too much optimism too quickly.

“Going forward, focus in China will increasingly be on longer-term structural reforms and on making the economy more consumer- rather than export- and investment-driven; this should, all else being equal, also dampen the country’s appetite for commodities,” Danske Bank analysts tell MarketWatch.

Also casting a cloud of uncertainty is the Fed. Commodities have been the beneficiaries of its loose monetary policy.

Over the next few months, The New York Times says, it is clear that the Fed will keep doing what it has been doing — buying bonds.

But further out the longevity of the current easing programs is in question.

There is debate currently brewing within the central bank, as some members appear ready to recoil the easing and allow the economy to stand on its own. The minutes from the December Federal Open Market Committee meeting revealed that some would like to see that happen this year.

Analysts are worried that an aggressive withdrawal of Fed stimulus coupled with slowing demand from China could prompt a commodities bust in the second half of 2013.

“Overall, we recommend clients on the consumer side to hedge [first half] commodities exposure early in the year, but potentially leave some exposure open for [the second half] to benefit from the stabilization or even price declines,” the Danske Bank analysts tell MarketWatch.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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