After succumbing to the impacts of a global economic crisis and suffering a consecutive eight-month decline, major commodity indices saw positive returns in March.
Analysts say the commodities prices can keep up with the rally on two conditions: One, the equity markets continue to perform well. And two, the banks, globally begin to make profits.
In a new report prepared by famed commodity strategist Francisco Blanch, Merrill Lynch (ML) said it saw most of the 'contangos' (future prices more than the spot prices) that have built over a range of commodities easing.
Ole S Hansen a commodities analyst at Denmark-based Saxo Bank said commodities have begun to rally on good news from equity markets and the banking sectors. He added commodities will face a reality check in June this year. The recent boost to the commodity markets has come from positive sentiments created by the G20 meeting, Hansen said.
Most of the indexes that track commodities rose in March, ML said. "Driven by double-digit gains in base metals coupled with returns in energy and grains, the MLCX TR index (the Merrill Lynch global commodities exchange) increased by 5.43 per cent in March, the S&P GSCI TR by 4.51 per cent (Standard and Poor's global commodities index) and the DJ-AIG (Dow Jones global commodities exchange) by 3.60 per cent. Equity and bond indices also appreciated, with the S&P 500 TR increasing by 8.76 per cent and the ML US Broad Bond Market index increasing by 1.50 per cent."
Although prices of base metals rose double digits, the prices of precious metals that had earlier rallied tumbled, ML said. "Base metals such as copper and zinc posted positive returns and brought the ML Industrial Metals index to 10.86 per cent for the month.
Meanwhile, gold and silver fell and the ML Precious Metals index (a Merrill Lynch index) ended the month at -1.88 per cent," ML said. ML data showed an index tracking lead rose about 22 per cent in March. A separate index tracking copper rose 27 per cent. In contrast, gold and silver depreciated two and four per cent respectively.
One of the best feedbacks came from the energy sector that has seen a strong contango due to spiralling oil prices for the past three months. "Although the energy contango persisted, the rally in spot prices of crude oil and products over the second half of the month brought the sector into positive territory. Despite US natural gas going against the trend in the energy complex, the ML Energy TR index (the Merrill Lynch that tracks energy) returned 5.07 per cent," ML said.
Hanson said commodities may, however, disappoint in June.
"The positive sentiment has emerged from the banks and we expect them to continue to perform well considering they are withdrawing money from the Central Banks at low interest rates and are lending it at high interest rates," he said.
Utilisation rates for commodities have risen in recent months, ML said. "While utilisation rates have collapsed for a broad range of industries such as motor vehicles, semiconductors or chemicals, but commodity utilisation rates are still high, suggesting that a rebound in economic activity will likely impact commodity prices before it hits other sectors."
