Asia Times: Commodity prices continue recovery



	April 27, 1999	atimes.com

Oceania

Commodity prices continue recovery
Bloomberg

SYDNEY - Australian commodity prices rose for the third straight month in April, led by rises in oil and wool, on expectations world economic growth won't slow as much as previously anticipated.

The Dresdner Commodity Price Index jumped 2 percent in the four weeks to mid-April when measured in special drawing rights, a basket of the world's five major currencies. Commodities account for about two-thirds of Australia's export earnings - the country is the world's biggest exporter of beef, wool and coal.

The Dresdner index, which is compiled in association with the National Farmers Federation, tracks 23 commodities, which account for about 70 percent of the value of Australian commodity exports. They include cotton, wheat, beef, wool, coal, gold, copper, aluminum and iron ore.

Commodity prices tumbled last year, as Asia's recession slowed demand. Now, prices are starting to pick up because there is a turnaround in the outlook for world growth in 1999 and beyond, Dresdner said.

Gains in the Dresdner Index are in line with an International Monetary Fund report last week which said the financial crisis that swept through East Asia and later spread to Russia and Latin America ''seems to be over.'' The IMF projected world economic growth would slow to 2.3 percent in 1999 and then accelerate to 3.4 percent next year.

This growth will drive commodity prices higher as countries demand more raw materials for manufacturing industries.

Australia's second biggest farm export, wool, helped drive the Dresdner Index higher. Wool rose 1.2 percent last week, to a one-year high of A$6.05 a kilogram, thanks to increasing demand from Europe. Europe buys about 40 percent of Australia's wool.

Wool prices tumbled to a five year low last October as clothing demand in Asia slumped.

Since February, the price for medium grade 21-micron wool has rallied 18 percent to A$6.06 per kilogram on the Sydney Futures Exchange, the highest since July 1998. Prices for fine, 19-micron wool have surged 43 percent since late January, mainly because of shortages. ''I think we're in the early stages of a longer term recovery,'' said Andrew McKay, independent wool analyst in Inverleigh, Victoria.

People are thinking more positively about the outlook for wool, he said, in part because cotton prices appear to have reached their lows and are now rising as well. That means competing fibers are getting more expensive instead of cheaper as they were for much of 1998.

Yet future gains in wool prices probably won't come as swiftly as the rally that began in February, McKay said, and fine wool prices are now ''way, way overvalued."

One of the problems the wool market will have to cope with is the large amount of wool ready to come back onto the market as prices rise.

At last week's wool auction in Australia, 23,000 bales - each weighing 176 kilograms - were added to the original sales roster of 85,000 bales, according to the Australian Wool Exchange.

Also helping push the Dresdner Index higher was a 52 percent rise in crude oil prices, from a 12 year low in February, to U.S.$17.94 a barrel.

Earlier this month analysts had predicted metals prices had hit their lows and would continue to rise, amid early signs of economic recovery in Asia.

Alan Heap, commodities analyst at Salomon Smith Barney (Australia) Ltd., said prices were ''coming off the bottom. Nickel has been through the worst and is coming out the other side, copper is pretty much there, though aluminum has probably got a little way to fall."

In U.S. dollar terms, nickel has increased 36 percent, from an 11-year-low in December, to $5,190 per metric ton on the London Metal Exchange. Copper has gained 12 percent since early March, also off an 11-year-low, to $1,558.50 per ton. Aluminum has come off a five-year low on March 4, rising 13 percent in six weeks to $1,313.

However, prices for Australia's biggest export commodity, coal, and third biggest export, iron ore, are down.

Exporters of these bulk commodities, which are sold largely under contract to Japan, in February announced price cuts for the Japanese fiscal year beginning April 1.

Australian iron ore producers accepted price cuts of up to 13.42 percent because of shrinking demand from Asian steelmakers.

Australian coal exporters, including Broken Hill Proprietary Co. (BHP), and Rio Tinto Plc, also agreed to price cuts of up to 18 percent.

Still, the more optimistic outlook for commodity prices helped push the Australian dollar to a one-year high 65.90 U.S. cents Friday. It has risen 6.9 percent this year, ranking it the best performing major currency in the world.

In Australian dollar terms, the Dresdner index rose by 0.8 percent and is down 8.3 percent from a year ago.