Liquidity within commodity markets is expected to increase as a range of new entrants begins to move into the market, according to ABN AMRO. But the trading patterns of some types of investor will also bring the greater price volatility more familiar to financial markets.
Speaking at ABN AMRO’s latest overview of the commodities market, David Phipps, Head of Commodities at ABN AMRO explained that commodities have now become ‘fashionable’ as an investment vehicle. Discussing the changing drivers to supply and demand of underlying commodities, he suggested that following the entry of hedge funds, demand could in the future be fuelled by pension funds in basket-type trades.
Another type of investor likely to move into commodities trading is the Professional Trader Group (PTG). Often formed by day traders to take advantage of economies of scale, PTGs currently operate widely within the financial markets. These groups represent up to 50% of daily trading volume in financials and could have a significant impact on liquidity.
Phipps explains: “All but two of the major European commodity exchanges have now made the transition to electronic trading; with lower barriers to entry it is
likely that PTGs will begin trading commodities. This additional liquidity will be of significant benefit to the commodity markets overall.”
ABN AMRO’s sector experts also provided views on the outlook for specific
markets at the briefing. This revealed a variety of influences, among which political uncertainty remains a key factor. More surprising was news that the cocoa market could see a significant increase in demand from Japan, where the benefits of chocolate as a health product are now being widely discussed.
Individual forecasts included the following:
Cocoa: Political unrest in the Ivory Coast could impact upon pricing, despite the good cocoa harvest. Prices are expected to rise in the short term due to short covering by funds. Supply will meet demand in the near term 2004.
Sugar: The recent oversupply is expected move to a small deficit in 2005/06, due to a fall in output from Australia following the recent drought combined with increased demand from China. With no unforeseen set-backs, prices could reach 8.5 US cents. Brazil’s output as a proportion of world production continues to increase, making it a key variable.
Coffee: Vietnam was a large contributor to oversupply and though the market appears to have found equilibrium prices have not yet reached pre-Vietnam levels. The increasing involvement of funds in coffee is a major factor to watch; despite heavy fundamentals funds could drive prices towards 80 US cents.
Base Metals: Macro conditions continue to fuel the bull market in metals. Massive ongoing demand from China is combined with limits on supply from past under investment in infrastructure. Funds are also having a significant impact in pushing prices upwards.
