Global economy, led by China, shrugs off soaring commodity prices

Global economy, led by China, shrugs off soaring commodity prices

Business is booming on Planet Earth

by Staff Writers
London, (AFP) May 14, 2006
The prices of commodities such as oil, copper, aluminium, platinum and sugar are smashing records -- and will head higher owing to fierce demand from economic powerhouses India and China, analysts say.

With sizzling rates of growth in the two emerging giants, home to one third of the world's population, supplies of raw materials will likely be stretched even further.

Low global inventories, limited production, supply disruptions and fierce demand prompted frenzied speculative buying across much of the metals complex last week.

Platinum, aluminium, zinc, nickel and copper struck historic peaks, while silver and gold hit the highest level since 1980. Copper forged a record 8,800 dollars per tonne and gold reached 730.40 dollars per ounce.

China is the world's biggest consumer of copper, platinum, wool, cotton and rubber, and the second biggest market for crude oil after the United States.

India, meanwhile, is the largest consumer of gold and silver.

"With strong (economic) growth in the emerging markets and further acceleration in Japan and Europe expected to continue... we maintain a positive outlook for commodity returns, despite the recent price rally," said Jeffrey Currie, London-based analyst at US investment bank Goldman Sachs.

"Growth in emerging countries and in China in particular is expected to become an ever-larger share of global economic growth, which we believe will underpin commodity demand growth."

China's economy is expected to grow at around 9.5 percent this year after expanding 9.9 percent in 2005, according to estimates from the International Monetary Fund.

The global economy, meanwhile, is forecast to grow by 4.9 percent this year, followed by 4.7 percent in 2007.

High commodity prices fuel fears of rising inflation because they can erode companies' profits and crimp global economic growth.

Thus far, however, they have had little negative effect, some analysts contend.

"Commodity price inflation shows no sign of abating," said economist Lars Kreckel at Dutch bank ABN Amro.

"Corporate sector (profit) margins have proven robust as strong volume growth has offset cost pressures. But as the global economy reverts to trend growth, some sectors could see profitability squeezed."

Although mining and oil companies are energised by high metal and crude prices, other sectors are hit hard.

In the airline industry, many carriers have imposed fuel surcharges to compensate for the surging price of jet fuel amid record crude prices, which recently hit records above 75 dollars per barrel.

"What you have seen over the last three years is that increasingly companies can pass on" higher commodities prices, said ABN Amro's Rolf Elgeti.

However after a record-breaking week for metals, investors banked profits, sending shares in mining groups sinking in London trade on Friday.

Some analysts caution that a correction in commodity prices might occur at some stage following the recent bumper gains.

"While... some correction is likely, prices will consolidate at a high level as fundamentals are also supportive," said Standard Chartered analyst Helen Henton.

"We continue to believe that global growth will ease into 2007, led by the US, but for now the economy is expanding strongly providing little relief for industrial material prices."