LONDON (Reuters) - To some the six-year bull run in commodities is definitely over, but depressed markets and deep cuts in output may yet set the stage for another bubble.
When that will be is uncertain given the crisis engulfing financial markets, but many investors take the view a significant recovery could be at least two years away.
Before then, many producers of grains, oil and industrial metals will have cut output or gone out of business because the prices they can charge for their products have fallen too far.
“Bubbles have happened in the past and they will happen again,” said Ian Morley, a director at fund manager Quantum.
“It’s not just hot money, but actually mass self-delusion by people in the market, including the so-called experts.”
The battering commodity markets have taken can be seen in the Reuters-Jeffries CRB index .CRB, a global commodities benchmark, which this month fell below 210 points, to its lowest level since 2002. It leapt to a record above 473 points in July.
“People have to invest for the long term, for that you need consistently higher prices,” Morley said. “When growth recovers, which will take 12-18 months, prices will head back up.”
Large cutbacks have been announced in the production of aluminum, used in transport and packaging, and in nickel and zinc, key ingredients for the steel industry.
Producers of copper used in power and construction have been slower off the mark, but they could follow as growth stagnates in developed countries and slows in the emerging world.
“The lower prices go and the longer they stay low, the bigger the next boom will be,” said Stephen Briggs, analyst at RBS Global Banking & Markets.
“The key for the next cycle is that projects are being deferred and canceled which means they may not come on stream in time for when demand is growing strongly again.”
The euphoria in commodity markets was fueled by investors looking to diversify away from stock markets after the crash in 2000 and seeking high returns to shore up their balance sheets.
Hot money followed institutions such as pension funds and gains accelerated. Many commodity prices hit record highs in July, despite signs of economic trouble ahead.
Oil hit a record high above $147 in July, but has since plunged by about 70 percent to just above $40 a barrel.
To try to halt the slide, the Organization of the Petroleum Exporting Countries (OPEC) has already agreed to remove about two million barrels per day from world oil markets.
OPEC meets again on Dec 17 in Algeria when it is expected to consider further supply cuts.
“Once world growth starts to recover, oil could bounce between 40 and 80 percent within six months,” said Michael Lewis, head of commodities research at Deutsche Bank.
The World Bank said this week it expects global growth to slow to just 0.9 percent in 2009 from 2.5 percent in 2008.
Analysts say when the global economy returns to trend growth — between 3.25 and 3.5 percent — the mismatch between demand and supply will once again dominate sentiment.
“Then you have the problem of finding five, six, seven million barrels a day of new oil from somewhere — a massive challenge,” Lewis said, adding that prices of agricultural products could be the first to start climbing.
“Supplies could be cut because farmers have no money, they can’t access capital or bank lending. They can cut the use of fertilizers and crop planting,” he said.
“All these things actually impact quite quickly.”
So, the story of supply shortages in the future has not changed and neither will investor interest, which could mean prices again rise to unsustainable levels.
Fund managers liken the last few years to the oil-shock in the early 1970s. An oil embargo by the Arab world in 1973 pushed crude prices up to $11.50 a barrel from $2.50 a barrel.
By 1980 crude was at $40 a barrel, a level which was a major factor in tipping the global economy into recession.
“Unquestionably bubbles will happen again,” Robert Talbut, chief investment officer at Royal London Asset Management, said. “But I suspect it will be quite some before commodities become a bubble again.”
Editing by Sue Thomas