Poor economic conditions resulted in fall in commodity prices and returns
By OH BOON PING
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PRICES of commodity stocks have slumped in recent weeks as investors slashed their holdings amid a worsening credit crunch.
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The stock price of Wilmar International nearly halved since January to close at $2.30 yesterday, while shares in Noble Group lost 66 per cent over the same period.
Similarly, Olam, which supplies nuts, spices and timber, closed at $1.04 - down from $2.80 on Jan 2 - while Golden Agri-Resources plummeted from its year's high of $1.20 to 18.5 cents yesterday.
The latest developments come after the massive sell-down of stocks across the region, following a worsening of the credit crisis.
Also, Singapore's economy has slipped into a technical recession, where the government is predicting a half percentage point contraction in gross domestic product (GDP) in Q3. Full-year growth forecast has been slashed to 3 per cent.
OCBC Investment Research analyst Carey Wong said: 'I guess the main kicker is when the economies will pick up as commodities are cyclical plays. So unless we see that there is a recovery in demand, commodities could continue to trend sideways.'
The credit crunch also stoked concern that banks may choke off lending to highly leveraged firms, thus affecting their ability to refinance their loans.
Said Mr Wong: 'Gone are the days of using cheap credit to fuel growth. And there is also the issue of weakening demand, which leads to lower cashflows and thus inability to meet debt obligations.' Hence, he adds, having a more leveraged business definitely exerts more pressure on the stock.
In terms of near-term outlook for commodities, Goldman Sachs hit a bearish note, citing poor economic conditions, which resulted in a sharp decline in commodity prices and returns.
'In fact, our global economics team has already reduced the outlook for global economic growth in 2009 from 3.7 per cent to 3 per cent, which in itself substantially weakens the forward outlook for commodity demand,' said the investment giant in a report.
Indeed, Merrill Lynch said that the freeze in the credit markets 'has been pushing oil demand lower in many countries, with US demand declining by almost two million barrels per day or 10 per cent year-on-year in the last four weeks'.
Vehicle sales are falling in developed and emerging economies alike, and air traffic growth is coming to a virtual standstill.
Despite the financial bailouts announced recently, Merrill thinks that there is little chance that banks will lend aggressively again in the coming months, even though bank credit default spreads and interbank lending rates in Europe and the US have fallen since then.
Goldman said that it has cut price forecasts across commodities - except gold - and sees further downside in near-term commodity returns.
The three-month price target for WTI Crude is set at US$70.50, while Brent Crude price could drop to US$69 within a quarter.
The three-month price targets for London gold and silver are set at US$930 and US$12.30 respectively.
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