Key commodities to remain pricey in 2011, polls show

Reuters: Sky-high commodity prices show no sign of easing, with supply shortages, swings in currencies and growth in emerging markets likely to keep key metals and grains on the boil in 2011, a suite of Reuters polls showed last week.

The oil market, however, stands apart, because it does not face supply shortages. Prices have risen near $100 this month, but they are still far below record highs, and analysts see limited scope for further gains.

Gold, copper and tin have all touched record highs in recent months, with copper nearing the psychological $10,000 a tonne mark and tin now above $30,000 a tonne.

A global rush for grains has turned into a vicious cycle. Weather difficulties took wheat prices to their highest since the 2007/08 food price crisis, which in turn stoked inflation concerns and prompted major importers to ramp up purchases.

With prices already high, investors in commodities must carefully choose where to put their cash, said Pau Morilla-Giner, Head of Commodities and Senior Portfolio Manager at London and Capital.

“You have to discriminate as much as possible. You can’t put all of them in the same basket. You might think if you buy a bit of everything you’ll get it right; unfortunately, you will not.”

Among industrial metals, he singled out copper and tin as having the strongest fundamentals and palladium as the most exciting precious metal.

End of cheap food?

In a week punctuated by violent protests in Egypt and by Algeria’s purchase of almost a million tonnes of wheat, Reuters polls showed US corn, soybean and wheat prices would stay unrelentingly high this year.

“Even if we have a good year, we are not going to have the inventories we’ve seen before. I really do think the time of cheap food prices is over, and that’s just it,” said analyst Chris Mann of Traders Group Inc in Chicago.

Grain prices could remain strong for longer due to depleted stocks and intense competition among crops for land use.

“It’s an interesting space, not because it’s going to go up, but because it’s going to be one of the very few hedges on potential emerging market inflation,” said Morilla-Giner, who prefers corn in the grain sector.

“It might not have the upside others have, but it’ll be working when maybe other areas of the portfolio will not be working.”

Gold retains gleam

Gold, which touched a record $1,430.95 last year, is expected to power up further, fuelled by low interest rates, dollar weakness and lingering worry over growth in major economies.

“The combination of continued QE (quantitative easing) in the U.S. and rising inflation pressures in the emerging world is a particularly bullish cocktail for gold,” said analyst James Steel at HSBC.

Palladium also stood out, expected to outpace platinum and make further gains. But analysts said a repeat of 2010’s stunning rises is unlikely as growth in emerging car markets moderates.

Copper and tin win

Among industrial metals, a widening market deficit could propel copper to new record highs this year while aluminium will also climb.

“The main driver for metal prices in 2011 will be the continuation of the near-zero interest rate environment and hence continuation in the hunt for profit in tangible assets,” analyst Carl Firman at Virtual Metals said.

Dwindling reserves of tin , bad weather and soaring demand are due to send the metal used in solder, tin plate and chemicals almost 38 percent higher this year, after touching record highs this week.

Prices of stainless steel material nickel are expected to rise this year as fast-growing demand runs into scarce supplies, which are likely to be curbed by the spike in coal prices.

Lead prices are expected to outshine zinc this year as the galvanising metal continues to struggle with vast stocks and another year of surplus.

Coffee in vogue, cocoa, sugar fade

Arabica coffee futures are expected to push to their highest in more than 14 years by the end of 2011 on sharply shrinking supply, while an increase in consumption will also lift prices of robusta.

Supplies, however, are ample in cocoa, and futures are expected barely to rise this year after ending 2010 as one of the worst-performing commodities. Large harvests in top producers are due to compensate for near-term supply disruptions in Ivory Coast.

Sugar is another commodity with a weak outlook as supply is only expected to just cover demand this year, pushing prices down by the end of 2011.

That fine balance, however, could easily be upset by dire weather or logjams at Brazilian ports, analysts cautioned.