Commodities RIP as leverage disappears

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Commodities markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials.

The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6bn, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show.

UBS AG, the Zurich-based bank that bought Enron Corp’s energy unit in 2002, plans to exit most commodity trading. About 15 percent of investors in Boone Pickens’s BP Capital LLC hedge fund may want their money back.

The same credit market seizure that led to last month’s bankruptcy of New York-based Lehman Brothers Holdings Inc and the forced sale of Merrill Lynch & Co is squeezing speculators who drove commodities to record highs. Slower expansion in the US, China and India is also undermining prices of crude oil, which fell 36 percent, and corn, down 43 percent.

“The day of steadily rising commodity prices is over,” said Chris Rupkey, the New York-based chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd.

“A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.”

The CRB, which doubled from 2001 to a record 473.97 on July 3, may drop 15 percent this year, said William O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. The last time the index lost that much was 2001, when the US sank into a recession. It’s down 9 percent for the year.

A global slowdown may cause crude oil to plunge another 47 percent to $50 a barrel next year, New York-based Merrill Lynch said in an Oct 2 report. Goldman Sachs Group Inc cut its forecast for copper next year by 12 percent to $8265 a metric tonne and aluminum by 18 percent to $2920 a tonne.

Corn may tumble as much as 15 percent to $3.87 a bushel in the next six months, and soybeans by 11 percent to $8.85 a bushel, said Don Roose, president of US Commodities Inc in West Des Moines, Iowa.

Investors who embraced commodities as an investment class like stocks and bonds, while demand from China and India eroded supplies faster than they were replaced, are now in retreat.

Outstanding contracts for 17 commodity futures traded in New York and Chicago fell 26 percent since a peak on Feb 29 to the fewest in two years, data compiled by Bloomberg show.

Net-long positions, or bets prices will rise, held by hedge funds and other large speculators fell to 7 percent of total open interest for futures on Sept 23 from 14 percent on March 25, according to an Oct 2 report to clients by Barclays Capital in London.

The decline follows an unprecedented rally as the UBS- Bloomberg Constant Maturity Commodity Index of 26 raw-materials rose every year since 2001.

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