Expect Short-Term Commodity Slowdown, Long-Term Strength: Analyst

Commodities will weaken in the short term as the Chinese economy starts to slow, but prices could once again move higher from this fall boosted by power constraints in China, Jim Lennon, head of commodities research at Macquarie Bank told CNBC on Monday.


“I think that there is definitely a slowdown and the government has been trying to cut the credit supply over the last nine months or so, that’s led to quite a lot of consumer destocking but the economy itself is growing at a very strong rate so I think there is still a potential for a turnaround,” Lennon said .

“The immediate constraint to China is power. The Chinese economy is facing quite big power constraints during the summer period. I think over time China keeps on hitting against constraints and that’s why structurally we remain bullish on commodities," he added.

Lennon said there was no doubt that the easier liquidity and a second round of quantitative easing had pushed all commodities up together.

"We’re now in that period of processing the wheat from the chaff," he said.

A gentle slowdown in China would see commodities slow down in the short term, Lennon said.

"I’m not saying that we will see a dramatic recovery in commodity prices in the next one or two months because certainly we are entering the weaker summer period, but going into the autumn we could see commodity prices move again,” he said.

He believed that hedge funds would not have suffered too greatly with the price correction of recent weeks as most took their profits before the fall in prices.

"They took their profits. Some got burned on certain commodities like oil, but a lot of these hedge funds got out of their positions,” he said.