Sector could return to success once again

This article is part of
Commodities - November 2013

Price increases for commodities in the third quarter have rekindled investors’ optimism.

The commodities sector gained in the third quarter. The S&P GSCI index, which comprises 24 commodity futures, recovered its losses from the first two quarters of the year. In the energy sector the supply of US natural gas and crude oil increased, partly because of fracking, which squeezed prices in the first half of the year.

Supply should also increase in the agricultural raw materials segment. Farmers reacted quickly to last year’s surge in corn, wheat and soybean prices and increased production. However, in the medium term, the prices of these could decline again.

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The situation for sugar and Arabica coffee is different: prices are below the long-term average, which suggests a potential upward move.

For industrial metals, a broad price increase is not likely in the next 12 months. Supply has expanded markedly in previous years. As a result, industrial metals have become susceptible to setbacks. For investors, this means that picking the right commodities remains essential.

Nickel and zinc offer upward potential at present: the low prices of these two metals should lead some producers to cut capacity and hence supply.

This varied picture shows that there is no prospect of a broad upswing for commodities for the time being. However, this could change in the medium term.

In the past, the commodities sector has often benefited from rising inflation and interest rates. Currently, inflation and interest rate expectations are low in the US and other major economies.

Nevertheless, central banks are aiming for higher inflation and stronger economic growth.

Commodities could then become a more sought-after asset class once again.

Asoka Woehrmann and Randy Brown are co-chief investment officers at Deutsche Asset & Wealth Management