Tin traders come out ahead in cat and mouse game

By Peter V O'Brien

Friday 18th June 2004

World commodity prices took off over the past 18 months and are now boiling.

Price movement since the end of 1981 for precious metals and a range of industrial metals are in Tables I and II. They were taken to the end of May but were sufficient to show the trend.

Movements for several agricultural products are contained elsewhere in The National Business Review's market tables.

A surge in oil prices was the latest manifestation of the phenomenon when Opec (which controls about a third of world production) failed to increase supply to a level sufficient to meet heavy demand as China's economic growth put intense pressure on all industrial commodities and the US returned to a growth path.

The China factor was a major reason for the percentage gains shown in Tables I and II.

It had a role in gold and silver price hikes with demand emanating from a rapidly growing Chinese middle class, where even 1% of the population represents millions of individuals.

Precious metal price movements were subject to traditional pressures; the "flight to safety," demand expected to outstrip supply and currency erosion, particularly the US dollar.

Individuals also invest in physical gold bars and coins (UK sovereigns, South African krugerrands and Canadian maple leafs) bought directly from bullion dealers. The jump in oil prices was recent.

Brent futures, for example, were quoted at $US30.38-40 at the end of last year. They were at $US36.52-54 on May 27, a rise of 20.2% in five months, compared with a 22.5% gain between December 31,2002 and May this year.

Potential investors in commodity futures should note that traders can be as shortsighted, even as silly, as their counterparts in equities.

Oil prices were falling in 2001 when the terrorist attack on New York's World Trade Center occurred but took a 15% dive two weeks later.

There were similar falls in metal prices as traders became concerned about the fallout from terrorism.

Industrial metals meandered through 2000, before the 2003-2004 boom. There was a short-term glitch in April this year, resulting from fears that measures to cool China's overheating economy would cut demand.

The Chinese continued to buy all commodities and trading got another boost when the pattern of US growth became clear.

Restocking of reserves in the US, and that country's increased industrial activity, affected prices. A modern military machine that throws lead, steel and other metals into a war effort eventually has to replenish armaments, resulting in demand for raw materials.

Table II's price fluctuations, in particular, were a warning to commodity speculators.

There were well-publicised views at the end of last year that commodity prices had peaked, leading to some traders taking short positions (selling futures contracts). Only precise timing would have avoided losses, with the exception of positions in nickel.

Currency movements in Table III show the adjustments New Zealand traders needed to make when calculating potential gains (or losses) in our dollars.

A rise in the New Zealand dollar after a position was taken in US currency would reduce any gain after realisation and currency conversion.

Any loss on the contract would also be reduced, while the reverse would apply in both cases (gains and losses increased) if the currency fell relative to the US dollar between taking a position and closing it.

Demand for New Zealand's export commodities rose strongly over the past year and the recent decline in the NZ-US dollar relationship was anther boost to returns.

Private investors can take commodity futures contracts on most of these products, with beef a big market in the US.

Beef prices in the US jumped more than 50% over the past year and were at late 1980s levels at the end of May.

Meat futures are traded on the Chicago Mercantile Exchange and various agricultural commodities on its competitor, the Chicago Board of Trade.

Metal traders work mainly through the New York and London Metals Exchanges.

Tin contract holders on those exchanges had spectacular gains this year, with a 54.2% increase in the metal's price.

Trading commodity futures can be a fascinating and financially rewarding game but also a deadly cat and mouse stalking game where speculators are the mice and end-user manufacturers the cats.

The latter have the financial clout, experience, patience and win-lose averaging capacity to catch the mice more often than they miss the pounce.

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