Commodity prices ease back from record highs

Commodity prices have eased back from record high prices, according to new research from Clerical Medical tracking the price performance of twenty major commodities. Over the first six months of 2008 commodity prices increased by 25%, more than eight times the increase in retail prices (3%) over the same period. Commodity prices subsequently declined by an average of 15% during July and August, reversing much of this increase. Overall, however, commodity prices rose by 8% during the first eight months of the year.

Cocoa has experienced the sharpest increase in prices

Since the start of the year, 11 of the 20 commodities tracked have seen their price rise by more than twice the increase in retail price inflation (3%), highlighting the broad nature of the commodity boom. With a 35% increase in prices, cocoa recorded the strongest increase during the last eight months. Sugar, at 28%, saw the second highest increase followed by corn (26%). The combination of strong global demand, historically low interest rates, a weakening US dollar and political instability have helped to drive up commodity prices in the past few years.

More than half of the commodities reached record highs during first half of 2008...

12 of the 20 commodities tracked achieved record high prices in the first six months of 2008. At a sector level, three out of the four commodity types - Agriculture, Base Metals, Energy and Precious Metals - have hit record highs with base metals the only exception.

...before falling back sharply over the last month

Faltering consumer demand and a strengthening dollar contributed to all four commodity groups experiencing a decline in prices during August. Precious metals recorded the sharpest decline over the month (-16%) followed by energy (-7%). However, energy prices are still 54% higher than at the same point in 2007 while precious metals have risen by 17% over the same period.

The fluctuating price of crude oil reflects market volatility

Within the energy sector crude oil reached a new peak of US$146 per barrel during July 2008, nearly three times the average price per barrel between 2002 and 2007 (US$50). However, amidst concern that the global economic slowdown will slow demand and against the backdrop of a strengthening of the US dollar, oil prices eased since to $116 per barrel by the end of August - a decline of 20% ($30) from July's peak. Nonetheless the price of a barrel of crude oil has increased by 21% since the start of the year

The volatility in oil prices has continued into September with the average price of a barrel of crude oil falling to as low as $91 before the largest recorded one day price gain earlier this week lifted the price of crude oil to $121 per barrel .

Heating oil also hit an all-time high during the first half of 2008, reaching US$399 per gallon during July before falling by 21% to US$315 per gallon by the end of August.

The price of Gold moderates from record high

Within the Precious Metals sector, the price of gold rose to $1,112 per ounce in March, a record high and 53% above the five year average ($663 per ounce). The price of gold did, however, decline by 17% to $835 per ounce by the end of August as the US dollar recovered. Despite this recent easing in value, the average price of gold is currently 24% higher than at the same point a year earlier.

Gold has performed well over recent times providing something of a 'safe haven' for investors with prices in 2007 rising by 32%, the biggest annual increase for 28 years.

In the Agricultural sector, soyabeans, hard wheat, soft red wheat, cocoa and corn all reached record highs during 2008 as did tin, copper and aluminum within the Base Metals sector.

A quarter of commodities have fallen in price during 2008...

Five of the 20 commodities tracked have fallen in price since the start of the year. The average price of wheat (soft red) has declined by 33%, followed by zinc (-28%) and lead (-24%). Although the fall in the price of a number of base metals is a continuation of a trend seen in 2007, the decline in wheat prices is more striking with soft red wheat recording the largest price rise across 20073 having reached a record high in the first quarter of 2008.

...with 75% of commodities recording price declines in August

During August, 15 of the 20 commodity classes tracked recorded a decline in prices. Precious metals were among the biggest fallers with the average price of silver declining by 21% in the month, followed by Platinum (-16%). In contrast, Nickel prices rose by 9% in August although prices are still 23% lower than at the start of the year. Coffee, at 5%, recorded the second highest monthly increase.

Five years

Commodity prices up by 112% over the past five years

Since 2003, commodity prices in general have risen by nearly six times the rate of retail price inflation; 112% against 19%. At a sector level, energy commodities have recorded the highest increase, at 259%.

Copper has seen the strongest price growth since 2003.

Over the past five years, 15 out of the 20 commodities tracked have at least doubled in price. Copper has been the best performing commodity over the past five years with a price increase of 330%, boosted by strong demand from China. Tin (311%) and lead (294%) saw the second and third highest growth rates. In contrast, cotton recorded the slowest rate of growth (16%).

3Based on the 2007 Clerical Medical Commodities monitor

Suren Thiru, economist at Clerical Medical, commented: "Commodity prices have fallen markedly over the past two months (since June) following a surge in prices over the first half of the year. Growing concern over the impact of the widespread economic slowdown on global demand and the strengthening in the value of the US dollar have been the key factors behind this recent reversal.

The weak US dollar during the first half of the year helped to push investors into commodities by increasing the purchasing power of other currencies and provided a safe alternative to the weakening US currency. This trend has reversed somewhat as the dollar has strengthened.

Nonetheless, the recent price declines must be put into context. Commodity prices remain 8% higher than at the start of the year."