Commodities head for first annual drop since 2008

SINGAPORE: Commodities headed for the first annual drop since 2008, paced by declines in cotton, copper and cocoa, on concern that the European sovereign-debt crisis and a cooling Chinese economy will sap demand for raw materials.

The Standard & Poor's GSCI Total Return Index of commodities fell 0.1% to 4,889.7 at 12:26 p.m. in London, extending this year's loss to 1.1%. Cocoa in New York plunged 30% in 2011 on signs of expanding supplies from Ivory Coast, the biggest producer. Cotton is down 37% this year amid increasing output and dwindling demand.

Copper, often seen as an indicator of economic activity as it is used in construction and automobiles, is set for the first loss since 2008. China is the biggest consumer of copper.

China's economy will grow 8.5% next year, down from 10.4% in 2010, the Organisation for Economic Co-operation and Development projected on November 28.

Manufacturing contracted for a second month in December as global growth faltered and Premier Wen Jiabao prolonged a crackdown on speculation in the housing market. Global equity markets have lost $6.3 trillion in value this year as Europe's debt crisis and slowing economic expansion weighed on investor demand for riskier assets.

"The two biggest drivers have been the global economic environment and the Chinese economy," said Dan Denbow, a co- fund manager of the $2.1 billion USAA Precious Metals and Minerals Fund in San Antonio.

"What happens next year really depends on what happens with global growth. Investors may not be as quick to come back to commodities unless they get a very good feeling about global growth."

The advance in prices of gold, oil and cattle helped limit losses. Gold, 10% higher in 2011, is on track for an 11th year of gains as investors seek protection against financial markets turmoil. Oil climbed 8.7% this year, set for a third annual gain, on speculation escalating tension in the Middle East may disrupt supplies as a recovery in the US economy bolsters demand. Live cattle futures in Chicago are up 13% as the US herd shrank.

The dollar's rally, up 1.6% this year against six foreign-exchange peers, has curbed demand for commodities priced in the US currency. Treasuries gained 9.6%, Bank of America Merrill Lynch index data show. Still, raw materials outperformed equities as the MSCI All Country World Index of stocks dropped 9.5%.

Commodities plunged 46.5% in 2008 as the collapse of Lehman Brothers Holdings triggered the worst recession since the Great Depression and sent global equity markets tumbling. They rebounded 13.5% in 2009 and rallied 9% last year as governments around the world ramped up stimulus spending to boost their economies.

The S&P GSCI Index touched an 11-month low in October, extending its decline from an April peak to more than the 20% threshold of a bear market, as investors cut holdings of commodities amid slower economic expansion.

There is a 50% chance of recessions in the US, the UK and euro zone economies in the next 12 months, Nouriel Roubini, the economist who predicted the US housing bubble that started the last slump, said in October.



Goldman Sachs said in a December 1 report that the world is likely to avoid a recession and maintained its "overweight" allocation to commodities, predicting a 15% return in the next 12 months. A close balance between supply and demand across raw materials "could drive a strong price rebound in early 2012," Barclays Capital said this month.

Metals' Performance

The LMEX (LMEX) index of six industrial metals retreated 23% this year, led by declines in tin, nickel and zinc. Spot silver is 9.3% lower in 2011, set for its first annual decline in three years. Palladium is poised to fall 21%, and platinum has lost 22%.

"Problems in the US, Europe and China have all contributed to the weaker performance this year," said Nick Trevethan, senior commodities strategist at Australia & New Zealand Banking Group. "The risk in moving into 2012 is what's going to happen in Europe particular. Some kind of major events there could put more pressure on the market from a sentiment perspective."