So much for those bullish forecasts on commodity prices. Rio Tinto PLC’s chief executive Tom Albanese told the Financial Times that customers are delaying shipments of metals, marking a shift in tone from a more upbeat view among commodities experts just six weeks ago.
“It is noticeable that markets are somewhat weaker,” Mr. Albanese said. “In a few cases, customers are asking to reschedule deliveries. This is consistent with customers being cautious about the current state of business.”
Investors haven’t taken this news well, driving Rio Tinto shares down more than 3 per cent in New York. However, investors were hardly on board with the previous upbeat views, either. The shares have fallen a total of 27 per cent since July, a decline that is far worse than the broader market. And Rio Tinto – a major producer of iron ore and copper – is by no means alone here: BHP Billiton Ltd. has fallen 24 per cent since July and Canada’s Teck Resources Ltd. has fallen 46 per cent from its high in January.
The declines come as commodities slide with decreasing economic forecasts. On Tuesday, the International Monetary Fund slashed its growth forecasts for global economic activity for both 2011 and 2012, with the U.S. economy expected to grow just 1.9 per cent next year, down from an earlier forecast for growth of 2.6 per cent.
Pat Chiefalo, an analyst at National Bank Financial, believes that there is the potential for commodities (as represented by the Dow Jones-UBS commodity index) to fall another 10 per cent, with short-term rebounds very limited.
Indeed, the analyst recommended hedging exposure to commodities by buying derivative-based investments that are designed to rise as commodity prices fall. Two stand out: the PowerShares DB Commodity Short ETN and the ProShares UltraShort DJ-UBS Commodity ETF – though neither is designed for long-term investors, or the squeamish.