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Fluctuations in commodities produce winners and losers

By Peter V O'Brien

Friday 6th October 2000

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Strong economic growth in the US and continuing recovery in Asian economies and improvement in Europe over the past two years has had a significant impact on prices for most commodities, particularly metals.

Tables I and II show the prices for six industrial metals and the three precious metals, gold, silver, and platinum, discussed earlier (NBR Personal Investor, Aug 4).

Prices for other commodities have also moved up, the most notable being oil, both for the actual price movement and the impact of the higher levels on general economic activity in all countries. The latest increases in the price of diesel fuel, for example, are affecting farming, fishing and the road transport industry with fuel bills for some operators 50% ahead of the same time last year.

Oil prices are more a case of limited supply rather than higher demand, although the former obviously affects the latter. Higher fuel costs are working down the industrial production and distribution chains to areas such as supermarkets, although signalled price increases for food and other grocery items also flow from the decline in the kiwi dollar's value. Even a product as basic as bread has been caught up in the dollar's fall, because the flour is brought in from Australia.

The movement in metal prices has been going on for some time (table I). The table is representative only of major minerals and excludes products such as coal, iron ore, oil and minerals sands, all of which have seen price rises in recent months.

The general situation in minerals was discussed recently in reports from Australia mining heavyweights BHP and Rio Tinto. BHP's preliminary report for the 13 months ended June 30 said the net profit impact from higher prices was $A230 million after tax compared with the previous year, with lower coal and iron ore prices partly offsetting higher oil prices and improved prices for copper.

Rio Tinto's report for the six months ended June 30 said volumes increased at the company's Hamersley Iron subsidiary in the six-month half-year due to buoyant Asia steel demand, which resulted in record production and shipments of iron ore. Chairman Sir Robert Wilson said the economic climate was favourable, resulting generally in demand growth and lower industry stocks of metals.

Those conditions would normally be reflected in stronger prices than the company was seeing, which "may be telling us that the market has concerns about the continuing durability of the US expansion." When presenting the company's preliminary report for the year ended December, Sir Robert said in February indications for 2000 were encouraging, with continued growth in the US, accelerating growth in Europe and some increase in Japanese industrial production.

Emerging Asia was rebounding from crisis, China continued to grow and "even Russia" was showing signs of ending its long decline. The prime uncertainty remained the timing and form of any slowdown in the US economy and whether growth in Europe and Japan would be sufficient to offset it. Markets were generally in balance, so strong global growth could lead to a robust price performance.

The price movements shown in table I confirmed Sir Robert's views. Prices were depressed at the end of 1998 and for the first six months of last year but improved considerably in the second half and have jumped this year, particularly for nickel.

Currency movements are an additional complication for New Zealand users of industrial metals and for investors, whether the latter take stakes in mining companies, industrial users of the metals or in commodity futures trading on their own account.

Last year's survey quoted Ord Minnett Jardine Fleming Futures New Zealand chief executive Colin Churchouse as saying his company had hundreds of people who traded financial and commodity futures. Those people would have done well if they bought futures in recent times, relying on price increases and did not close out contracts - or have them closed out for failing to produce more margin on the dips.

Currency fluctuations are a two-way street. Exporters of commodities such as meat, wool and dairy produce have benefited from a combination of higher world prices and falling currency. NBR's table of commodity prices (page 53) shows butter prices went from a 1999/00 low of $2500 a tonne to $2920 in the week starting September 18. Casein jumped from a 1999/00 low of $10,420 a tonne to $11,670. All meat types had strong price rises from their lows and even wool, the perennial problem in primary produce, has had good gains over all classes.

That has made life on the farm better than it has been for some time but there has been, or will be, an increase in the cost of imported inputs.

A similar problem affects the business of companies that import a considerable amount of their inputs and export finished products. The annual meeting of Fisher & Paykel Industries in August was given a good summary of the positives and negatives.

Chairman Sir Colin Maiden said Fisher & Paykel decided more than 12 months ago to look in margins at a time exchange rates appeared favourable.

As a consequence it was covered for up to two years out in US dollars and Australian dollars. The company's healthcare sales were predominantly in US dollars and foreign exchange cover at around 50c continued to provide good levels of profitability.

Sir Colin said a low New Zealand dollar also had an impact on the import side for whiteware, because a significant portion of its costs were in US dollars.

Other companies have made similar comments, either in their reports or at annual meetings.

Table III shows movements of the New Zealand dollar against the US and Australian dollars, sterling, the yen, the Korean won, the Taiwanese dollar and the trade-weighted index (TWI).

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