Great Investment Articles

By Saijel Kishan

Oct. 5 (Bloomberg) -- The commodities ``supercycle'' isn't over and prices may rise because of production shortages next year, said Morgan Stanley, the world's biggest securities firm by market value.

Global supplies, which are three to five years behind demand, may test record lows in 2007, the New York-based bank wrote in a report today. ``The next leg upward in the commodities cycle'' will happen in the next 12 months, it said.

``The best-ever fundamentals for the sector remain fully in place,'' analysts led by Wiktor Bielski said in the report. ``We believe that we may not yet have seen the highs for commodity prices and therefore the commodities supercycle is just pausing for breath.''

The Reuters/Jefferies CRB commodity Index has slumped 19 percent from its May 11 record, ending a rally in prices that began in 2001, because of concern that rising interest rates and slower global economic growth may curb demand for raw materials.

``We believe these fears are overdone,'' Morgan Stanley said. Consumers in Europe, Japan and other Asian countries will replace the slowdown in U.S. consumer spending, the bank said. An increase in company expenditures and the effects of globalization will limit the slowdown in U.S. housing.

Economic expansion in China, the world's most populous country, a shortage of mining supply and investor demand for commodities will drive prices higher for a ``number of years, although we of course expect pauses and bumps in the road,'' the bank said. Pension and mutual funds have invested $120 billion to $150 billion in commodities, it said.

Forecasts Raised

Morgan Stanley raised its 2007 forecast for average copper prices by 17 percent to $3.50 a pound and $3.15 a pound for this year, compared with its previous 2006 forecast of $2.98 a pound.

The bank also increased its forecast for nickel prices next year by 30 percent to $10.75 a pound. Iron ore prices may rise 15 percent next year, Morgan Stanley said.

The bank cut its forecasts for coking coal, used to make steel, by 9 percent to $105 a metric ton for the Japanese financial year 2007 and 2008.

Morgan Stanley also reduced its forecast for aluminum by 16 percent to $1.05 a pound in 2007, and forecast a ``modest decline'' in steel prices early next year.

Bielski's views on commodities conflicts with those of Morgan Stanley chief economist Stephen Roach, who said last week that a correction in commodities has only just begun. ``As always, there will be fits and starts and possibly some tradable rebounds along the way. But a China slowdown, in conjunction with a downturn in commodity-intensive U.S. homebuilding activity, will challenge the widely held belief in the commodity supercycle,'' he said in an e-mail response to questions.