NEW YORK (Dow Jones)--Supply and demand factors remain price supportive for commodities even as "new fundamentals" add to gains seen in agricultural products, oil and base metals, Lehman Brothers commodities experts said Thursday.
Even though traditional fundamentals for metals remain relatively price healthy, questions have arisen about the extent to which speculative money is affecting prices, Michael Widmer, vice president and metals research analyst with Lehman, said during a press briefing.
To test this, Lehman developed two indexes, one to measure exchange-traded metals like copper and aluminum where speculators have easy access and the other to measure non-exchange traded metals like cobalt and iron ore where speculators can't get into the market as easily.
In what Widmer described as a surprise, the non-exchange traded metal have outperformed the exchange-traded metals since 2002.
"It seems as if fundamentals do have some relativity on the metals markets," Widmer said.
At the same time, so-called "new fundamentals" are moving prices in addition to traditional supply and demand fundamentals, said Edward Morse, managing director and chief energy economist with Lehman.
Those include the "phenomenal growth of investment money into commodities," Morse said, citing growth in open interest for futures, options and in the over-the-counter market.
In addition to demand from long-only funds, hedge funds and algorithmic traders, these new fundamentals include the Federal Reserve's recent aggressive rate-cutting actions and a weakening dollar leading to more money flowing into commodities, Morse said.
He added that inflation concerns are also driving those inflows. Morse noted, though, that there is limited evidence that this correlation holds up over time.
Describing the more traditional fundamental factors, Morse said that since the early part of this decade there has been an imbalance between supply and demand for commodities including agricultural products, oil and copper.
That has combined with "a running down of commercial inventories" and a drawing down on producible assets, resulting in prices rising more than expected, Morse said.
China has played a large role in increasing demand for commodities.
While China's exporting sector may be hurt by slowing western economies, segments of the Asian nation's economy will still be able to perform well, Widmer said. The Chinese construction sector, for example, will likely remain a strong consumer of metals as it is focused on China's domestic market.
As demand remains healthy, producers continue to be hurt by cost inflation, Widmer said.
So inventories that have been drawn down to historically low levels, such as copper, are not being replaced as fast by the mining sector. Since the mining sector has also been operating at full capacity, the markets have been especially sensitive to supply disruptions such as electricity problems seen in Chile, Africa and China.
"It's hard to forecast really big surpluses on the metals markets," Widmer said, which should be price supportive.
Source: Matt Whittaker, Dow Jones Newswires; 201-938-5959; matt.whittaker@dowjones.com