Metals and minerals producer Rio Tinto made it clear in their latest earnings result that speculators are a major force in the commodities markets right now. This is especially the case since demand from the US, Europe, and Japan currently remains weak, leaving China as one of the only real engines out there for demand. This means that much of the strength in 2009’s commodity markets could be simply financial speculators, which aren’t the best sources of market support.
Rio Tinto Commodities Outlook: One implication is that many markets are likely to see substantial volatility as speculative forces are affected by a range of factors including: news flow on fundamental developments in individual commodity markets – including for example the pace of any restocking in OECD economies; shifts in broad market sentiment – for example related to the health of the global financial system, the strength of private sector investment in major economies and exchange rates; and changes to the opportunity cost of taking speculative positions.
To their credit, Rio is acting in line with their stated position. In the first half of this year, they actually cut back on production for most of their products, except for gold, copper, and the coking coal used for steel production.
While they remain bullish on the long term story for their products, they are still playing defence. Risks Rio says to watch out for include:
- And end to inventory rebuilding for commodities.
- A slowdown in government stimulus.
- Continued restraint in consumer spending.
- Growth in production capacity due to liquidity in credit markets.
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