Commodities Outlook For The Remainder Of 2012: Different Story In Second Half

In 2011, commodities performed well in the first six months; however, the second half was a different story. Estimates for 2012 were quite bullish, but expectations have not been met to date. The variable with the most impact may be the financial crisis in Europe. This doesn't just affect 2012, as financials in both the United States and Europe could wait years to see the kind of growth it experienced over the decade before 2008. One thing for certain is that countries will have to refigure the retirement age and funding programs to create a healthy balance sheet. These issues have hurt China's growth as well. With lower growth, China's demand for commodities could wane and drag pricing down further. It has been approximately four years and over $2 trillion in stimulus since the beginning of the U.S. financial crisis. Low interest rate policies plus quantitative easing, have also increased the balance sheets of the world's largest economies. Some wonder how long it will take the world to recover. We have not seen it yet, but a hard landing in China would significantly hit commodity pricing. Many believe sub 7% growth for a year constitutes a hard landing. China's massive demand for commodities includes half of the world's iron ore and 40% of its copper. Both have seen significantly lower pricing, as China's economy has slowed. Fitch has estimated that China has a 60% chance of entering a banking crisis by mid-2013.

As stated earlier, commodity prices rebounded nicely in the second half of 2011. Here are the average prices of commodities for 2011:

Commodity	Price
Brent Crude	$100/barrel
Natural Gas	$4.20/million British Thermal Units (Btus)
Aluminum	$2,50/tonne
Copper	$9,200/tonne
Nickel	$23,700/tonne
Zinc	$2,300/tonne
Gold	$1,612/ounce
Silver	$38/ounce
Platinum	$1,784/ounce
Sugar	22 cents/pound
Coffee	$2.38/pound
Soybean	$14.25/bushel
Wheat	$7.50/bushel

With the exception of gold, all of these commodities should see lower pricing averages for 2012. In 2013, prices should get back to the 2011 levels, barring further world economic problems. It's important to note we are not out of the woods yet. Because of this, several countries could get hit very hard should pricing fall more than expected. Here are the world's most levered economies by gross domestic product (GDP):

1. Kuwait: 84.2%
   
2. Qatar: 51.7%
   
3. Saudi Arabia: 43.3%
   
4. Oman: 41%
   
5. Kazakhstan: 30.2%
   
6. United Arab Emirates: 29.4%
   
7. Nigeria: 27.2%
   
8. Norway: 21%
   
9. Venezuela: 16.7%
   
10. Vietnam: 16.2%
    
11. Russia: 16.2%
    
12. Malaysia: 14%

This list is skewed to a certain extent given its leaning toward oil-based economies. It does point out what would happen in the case of a double-dip recession. Every country on this list has a significant portion of its commodity production to energy. This includes natural gas, liquefied natural gas, crude and its refined products. Of this group, here are their ranks in the world with respect to total oil production per country:

1. Saudi Arabia: 1
   
2. Russia: 2
   
3. United Arab Emirates: 8
   
4. Nigeria: 10
   
5. Kuwait: 11
   
6. Venezuela: 12
   
7. Norway: 15
   
8. Kazakhstan: 19
   
9. Qatar: 20
   
10. Oman: 25
    
11. Malaysia: 28
    
12. Vietnam: 36