Tags: Commodity | Prices | the | Rise

Commodity Prices on the Rise

Monday, 10 April 2006 12:00 AM

A Financial Times article this morning reports that the commodities boom has much more room to move.

Experts in the industry cite the fact that commodities companies are not ramping up production because of conservative planning. Therefore, the supply/demand imbalance persists.

Freeport McMoran Copper and Gold's CEO Richard Adkerson tells the Financial Times that mining prices are cyclical, and the long-term planning prices should not be changed. In other words, the company will continue to mine commodities based on the belief that prices will come back down.

For example, long-term planning prices for copper are set at 80 to 90 cents per pound. Currently, copper is trading at about $2.70 per pound - that's four times the price that these companies are using to determine their production levels. Therefore, the companies are pulling fewer tons of copper out of the ground.

As commodities prices rise, companies should increase production so that they can earn more money. That, in turn, would bring supply in line with demand. But that's not what's happening.

As a result, commodity prices are being driven that much higher.

A hedge fund manager tells the Financial Times: "You have this standoff between the producers who think these commodity prices are not real, and are therefore not investing enough in new supply, and the hedge funds who are putting more money into the commodity market because they see that the producers are not reacting quickly enough by bringing on new supplies."

Pension funds, which are seeking to diversify their portfolios away from equities and bonds, are also investing in commodities, reports the paper.

In contrast to the head of Freeport McMoran, Xstrata Copper's CEO Charlie Sartain told a mining conference last week that mining companies should embrace higher prices. "There seems to be an acceptance that we are going to have higher oil prices for longer, as the days of $20 oil appear to be over. I think there needs to be the same debate over metal prices," said Sartain.

Plus, Sartain argued the cost of mining is increasing, justifying the higher prices of commodities. Sartain pointed out that higher energy prices and remote and deeper locations of new deposits are partly the reason for higher commodity prices. 

In early-morning trading, gold was at $598 - looking to top the $600 mark once again - and silver hit 23-year highs at $12.50 an ounce.

The Wall Street Journal featured a great story on the virtues of ETFs on Sunday. MoneyNews encourages you to check out the entire article.

But one sector that the WSJ focused on was emerging markets, saying, "ETFs are especially worth considering for investors looking for exposure to volatile but promising areas, such as emerging markets."

The WSJ points out that investors looking to buy individual stocks in countries such as China, Brazil and Mexico may not be able to research these stocks in-depth, and accounting standards are different in emerging-market countries.

And mutual funds, says the WSJ, generally charge higher fees than ETFs, impose penalties if an investor trades in and out of the funds frequently and trade only once a day, which is troublesome in volatile markets. Plus, mutual funds rarely allow investors to invest in just one sector or country.

Therefore, ETFs should be the vehicle of choice for investors who want to bet on a certain sector.

According to Jack Ablin, CIO of Harris Private Bank: "With pinpoint precision, an ETF allows you to focus on a particular area of the market or world where you want exposure. That's a real plus for investors."

The Journal highlights a few ETFs to which investors should pay close attention. The iShares MSCI Brazil Index Fund, says the WSJ, "enables investors to wager on continued growth in Brazil. The ETF's share price has risen 79% over the past year."

Meanwhile, "the iShares MSCI Mexico Index Fund has gained 59% over the same period," says the paper.

PowerShares Golden Dragon Halter USX China Portfolio is also noted in the WSJ as an ETF that "is more diversified, and considered less risky, than other ETFs focusing on China, and is up 26% over the past year."

Marketwatch has an interesting report out this morning making the case that the March retail report will be the difference maker as the Federal Reserve decides whether or not to continue raising interest rates.

The article, written by Marketwatch correspondent Gregg Robb, says economists on both sides of the fence over raising rates or keeping with the status quo are "anxiously waiting for the March retail sales report next Thursday for clues to the health of consumer spending going forward."

Robb quotes BMO Nesbitt Burns economist Michael Gregory, who says that if retail sales are strong, a lot of people might start reassessing the view that there will only be one more rate hike.

"A lot of the one-and-doner's could be starting the reassessing process," Gregory said.

If the March retail numbers are sagging, that could be enough to "send the Fed to the sidelines," Robb writes.

So far this year, retail sales have been a mixed bag, with sales rising 2.9% in January but declining 1.4% in February due to colder weather. "The average forecast of economists surveyed by MarketWatch calls for retail sales to rise 0.4% in March," says Robb. "Sales excluding autos are expected to also increase 0.4%."

March retail numbers will be released on Thursday morning.

Efforts to launch a Disney TV channel have stalled. The company applied for a broadcast license back in 2003, but so far the Chinese government has not given its approval.

Last year Chinese leaders clamped down on foreign participation in China's media, saying they wanted to preserve the nation's "cultural security," the Los Angeles Times reports.

Without a TV channel to promote its offerings, Disney has been making slow headway in penetrating China and reaching its 300 million children under age 15.

"Disney has a business model predicated on the widest possible exposure of its media properties to drive attendance at its theme parks and purchases of home video and licensed products," David Wolf, managing director of Wolf Group Asia, a China-based media consultant, told the Times.

"Without broad, consistent local distribution of its films and TV shows in China, their model won't work."

Disney has a 43% stake in Hong Kong Disneyland, which opened last September. But attendance has been disappointing. Disney had projected annual attendance of about 15,300 a day, but actual attendance has been 10,000, thanks in large part to the admission price - more than $120 for a family of three.

But Disney is moving ahead with its China efforts. The company has been negotiating to build a theme park in Shanghai and expects to add 2,200 retail stores in China this year, nearly doubling its total.

Disney has also reached an agreement to bring the musical "The Lion King" to China this summer, although it took Stanley Cheung, the company's chief in China, a year to work out the details with government officials.

Cheung hopes the musical will help raise Disney's "profile with Chinese adults," according to the Times.

"Reaching grown-ups is seen as crucial to breaking through cultural barriers and boosting spending on Disney goods by Chinese families."


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A Financial Times article this morning reports that the commodities boom has much more room to move. Experts in the industry cite the fact that commodities companies are not ramping up production because of conservative planning. Therefore, the supply/demand imbalance...
Monday, 10 April 2006 12:00 AM
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