Commodities bulls boosted by oil recovery

Commodities from copper to iron ore have rebounded, helped by a rising oil price and a weaker US dollar, raising the possibility of investors taking a more positive view on a sector that has suffered years of negative returns.

After a poor end to 2014, sentiment has started to improve, helped by a recovery in energy.

The Bloomberg Commodity index, which tracks 22 exchange traded commodities but is weighted towards oil, briefly turned positive for the year on Wednesday as crude approached $60 in the US and $70 in the rest of the world.

The index slumped 17 per cent last year, the biggest annual loss since the global financial crisis, as investors fretted about slowing growth in China, the world's biggest consumer of raw materials, and the oil price rout.

While energy has been the main driver of the rally, raw materials tied to China's construction industry have also started to improve.

"It seems that investors are taking in stride the poor macro readings coming out of China, confident that the government will respond with additional stimulus," said Edward Meir, an analyst at INTL FCStone.

A reduction in stocks and a late buying spree by Chinese steel mills ahead of the peak summer demand period has helped push iron ore, the key steelmaking ingredient, up almost 30 per cent since it hit a six-year low of $46.70 a tonne a month ago.

Copper hit a five-month high of $6,479 a tonne this week after rising for nine straight days before slipping to end the week at $6,388.

That is up 18 per cent from January, when hedge funds in China pushed the price down to five-year lows.

Metals from copper to zinc and nickel are also benefiting from supply constraints rather than any sign of better demand with two large zinc mines, Lisheen in Ireland and Century in Australia, set to close by the end of the year.

However, agricultural commodities have remained weak. Wheat has declined below $5 a bushel and corn less than $4 as the world enjoys two years of record crops and looks at forecasts of another year of record production.

Strategists reckon a sustained recovery in commodities prices needs demand and therefore global growth to pick up.

"If we're having rallies in energy markets and industrial metals markets that has to be supported by strong economic growth and good demand in the industrial and manufacturing sectors globally, and I don't think we're seeing that yet," said Kevin Norrish, at Barclays. "This doesn't sound yet like it is fundamentally justified."

Even if prices move higher, the upward sloping pattern of futures prices might drag on returns for investors as they are forced to replace expiring futures contracts with more expensive ones.

This market structure, called contango, is a sign of ample supply and is prevalent in commodities including crude oil, coffee, corn and natural gas.

"It might be too soon to suggest commodities are moving up the league table of asset class returns," said Michael Lewis, global head of commodities research at Deutsche Bank.

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