Which of Commodities ahead of fundamentals?

My readers know I am a natural bull on commodity, but recent rally in commodity seems to suggest that it is getting ahead of fundamentals again. I think, the strong uptrend in commodity prices since February has been propelled more by technical than fundamentals and it could snap back to reality before resuming a more moderate uptrend in line with a ‘U’ shaped global growth path.

I am more concerned about base metals as it has posted the strongest rebound among the commodity groups, arguably due to China’s copper imports, which driven by strategic reserve buying and the re-stocking of deleted inventories to take advantage of low prices, not to reflect strong growth in global manufacturing or consumption.

No doubt, that China’s infrastructure heavy fiscal stimulus will provide some support to commodities but other private demand may continue to be weak, suggesting that China’s commodity demand may level off at somewhat lower levels than recent trends. Non-precautionary metal demand has been flat globally, leaving the metal prices uptrend without any real economic backing. Base metal demand tends to spike up in the spring as refiners stock up before metal producers primarily in Europe take their summer holidays. Demand for aluminum by beverage makers rise in the spring in anticipation of higher demand for canned beverages in the summer. After restocking ends, base metal demand will likely dip into a summer lull.

And in the case of iron & steel, contract bulks remain in limbo. Negotiations have already passed April 1 start of the 2009 contract year yet benchmark iron ore contracts are still to be settled. Steelmakers are demanding drastic price cuts (40-60%) back to 2007 levels, and sellers have been stalling for time in hopes that the market will improve. Producers have offered iron ore in the sport at temporary prices 20% below the 2008 contract levels, and the recent rebound in prices are on higher freight costs, not higher demand. The Baltic Dry Index was up 228% since the beginning of 2009.

Preliminary forecasts suggest hat oil in 2009 will mark the second back-to-back annual oil demand decline since the 1980s as industrial and residential demand slows and commercial inventories are high around the world. As such, spot and future prices are likely to face further pressure along with a return in risk aversion.

OPEC’s cuts have contributed to tightening supplies somewhat but have yet to lead to much of an erosion of stockpiles, particularly in the US, where crude oil inventories are just off the highest levels since 1990 and well above the 5-year average. In Europe and Japan, the supply overhang is less pronounced but stockpiles remain well above average levels, indicating no supply shortage. The recent data from the Department of Energy suggesting an 8% drop from early May 2008, with the decline in air traffic contributing to double digit declines in jet fuel demand.

In short, I am seeing commodity exporting economies and their currencies are like commodities, vulnerable to a reversal of risk appetite.