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Material Matters: Analysts Turn Positive On Commodities Exposure
FNArena News - September 13 2012

- Standard Chartered turns more bullish on commodities
 - UBS also moves to an Overweight position in resources
 - Some grounds for an iron ore price recovery
 - Coal could also enjoy some gains
 - CBA updates mineral sands outlook

By Chris Shaw

Despite poor price performance in commodity markets so far this year, the view of Standard Chartered is the market is now in the early part of a more bullish phase for commodities. Since June 21st, 14 of the 16 key commodities have risen in price and the commodities basket used as a general reference has gained 10% over the period.

June may prove to be a turning point, as Standard Chartered notes history shows turning points in the market usually come when the outlook is weakest. As well, there remains potential for significant price rallies from any pick-up in demand as consumers are currently operating on hand-to-mouth inventory levels and supply remains constrained for many commodities. 

An example is copper. While inventories in China are low, as much as one million tonnes of the metal has been taken out of the market and is in bonded warehouses where it remains tied up in financing agreements. Yet, observes Standard Chartered, the price has been rising. This is seen as a bullish sign, as higher prices mean consumers are running out of stock, traders have become short and supply remains constrained. 

The analysts are also bullish on gold given the industry is building limited new mine supply each year at the same time as Chinese and central bank buying continues to increase. Gold also stands to benefit from continued loosening in monetary policy globally.

While bulk prices have been far weaker than Standard Chartered expected, this is now in the price and the falls in recent weeks could in fact be a positive longer-term as low prices may discourage new capacity additions. 

While factoring in lower commodity prices has caused Standard Chartered to cut earnings forecasts and price targets across the sector, this has not detracted from the newly bullish outlook as the weakness in resource equities is regarded as having been overdone.

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Our archive tells no lies. FNArena warned its readers well before the price of crude oil peaked in 2008 the speculator bubble would deflate with devastating consequences for those holding oil company shares. In August we warned the most severe correction in modern history was forthcoming for natural resources. In 2007 we warned the problem with US subprime mortgages would prove much bigger than experts and media were anticipating (among other things).

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