Banks and fund managers forecast continuing growth in demand for natural gas and oil and a supply crisis in iron ore, copper and coal, leading to sharp price rises in those commodities.
Analysts cite a combination of reasons for their outlook. One is that there will be supply issues for raw materials due to a fallout from the 2008 financial crisis, when a vast number of mining projects were derailed. Moreover, environmental clearance will become harder to get in future, particularly in light of the recent BP oil spill in the Gulf of Mexico.
The potential for liquefied natural gas (LNG) demand to rise significantly is under-rated by the market, argues Charles Whall, director of investment management and oil analyst at London-based fund manager Newton.
Natural gas is relatively clean, flexible and abundant, and its generating capacity is quick and cheap to install. But Whall says LNG demand forecasts fail to recognise further natural gas penetration within the energy mix, which will happen due to environmental, price and security concerns. “It is a wholly unappreciated piece of the energy puzzle,” he adds.
There are signs the global economy is starting up again, and the LNG gas market is likely to tighten quickly by 2012, says Whall, as nuclear and alternative sources struggle to satisfy Asia's burgeoning thirst for energy.
Oil markets will also tighten over the same period, with new projects failing to replace underlying depletion of existing fields, causing oil demand to rise each year by 2 million barrels a day. “The oil price will likely hang in at current levels until mid-next year, then it could rise sharply,” he adds.
The BP oil spill in the Gulf of Mexico has been deeply shocking, but has not had a great impact on oil supply as yet, says Whall, who spent his early career working as a drilling engineer on oil rigs. "It is on the periphery currently, however is likely to contribute to a tightening oil market in future," he says.
There is likely to be greater regulation, environmental and safety standards, which will extend the process of awarding licences, exploration, appraisal and design, adds Whall, meaning new projects could be delayed.
Meanwhile, the market is not pricing in a supply crisis that is looming in key construction commodities such as copper, coal and iron ore, says new research by Asia-based Standard Chartered analysts.
The report – How the 2008 global meltdown planted the seeds for the next commodity bull market – predicts copper prices will spike to $12,000/tonne over the next two years; iron ore prices could rally to $200/tonne within 12 months; and coking coal could revisit previous highs of $350/tonne even sooner. Today copper is $7,200/tonne, iron ore $133/tonne and coking coal $187/tonne.
“These shortages are a hangover from the 2008 economic crisis and the postponement or cancellation of nearly $200 billion worth of new mining projects after the Bear Stearns collapse [in early 2008],” says the report, which was published last week.
Most copper, iron ore and coal projects face delays of at least two to three years compared to their plans before the crisis.
Even larger companies with strong balance sheets seem less willing to push the boat out on new mines. This is a major U-turn from their aggressive ‘build, build, build’ mentality before the crash in 2008, says Standard Chartered.
Such views explain why banks in the region – such as Credit Suisse, Nomura, Standard Chartered and UBS – are expanding their commodities desks, due to anticipated greater demand for commodity hedging and investment.