JOHANNESBURG (Business Day) -- Classic Business Day gets commodity expert John Clemmow on the line from Investec in London about the booming global commodities markets, and his view on the speculative bubble that's waiting to burst.
LINDSAY WILLIAMS: The last time I spoke to John Clemmow the world was a safe place for commodity investors - gold was probably around $550 an ounce, and copper was below $5,000 a tonne - and it wasn't that long ago I spoke to John. Today has been extraordinary for commodities, and the last few months has been an extraordinary time for the sector. John, we haven't spoken for two or three months - the pace of the commodities boom at that was fairly fierce, but it's become almost an untenable situation with the long legs it's suddenly got.
JOHN CLEMMOW: I think that's fair to say. I think almost everybody would now acknowledge that what we've seen is a fully-fledged bubble emerging in commodity prices - is the bubble about to burst or not? I would have to say that the supply and demand fundamentals for the commodities that are consumed - remember gold is not really consumed, so supply and demand doesn't really come in there - but supply and demand fundamentals for most of the commodities doesn't justify pricing anywhere near these kind of levels. The bullish investors that remain out there are justifying prices purely based on speculative fund buying, and frankly I think that's pretty scary.
LINDSAY WILLIAMS: To what extent is the fund manager - the speculator in commodities - driving these prices? The last say 10% for example?
JOHN CLEMMOW: I think a bit more than the last 10% - the answer is totally. What we're hearing - and you're right in saying it's an extraordinary day today - the rumours swirling around the London market today have just been incredible. One bank is rumored to have lost a huge amount of money on the commodity markets, there's been speculation of emergency meetings at the London Metal Exchange because there's been cash flow problems with some of the members there. This is a market that's being driven by some insane flows of money - there's been a great deal of rumours out there because in reality nobody actually knows the underlying facts. Some of the estimates are - and they're reasonably accurate - that the commodity fund purchases are now sitting long, using copper as an example about 450,000 tonnes. When you think that the global stockpile of copper at the moment is only around 120,000 tonnes that's a serious amount, and that's why we're seeing these incredible prices.
LINDSAY WILLIAMS: I noticed the LME copper stocks the other day at 115,500 tonnes - I think that was announced on Tuesday morning - so any speculator could come into the market with a substantial amount of money, but nothing that will stretch him too much, and take out those LME stocks. Then the price could be $10,000 a tonne before you know it.
JOHN CLEMMOW: Yes, very much so. The problem that you have here though is that commodities - again with the exception of gold, always remember that caveat - do actually exist in the real world, and the mining companies are getting these prices. Me telling you I think that price is outrageous doesn't mean that BHP Billiton [NYSE:BHP] or Anglo American [Nasdaq:AAUK] are not achieving that price. Equally that means people are paying that. Last year we saw global copper consumption actually fall while the price shot up, and that was in reaction to prices that are substantially lower than they are now - I'd have to suggest that we've got to consider the impact on demand with this pricing. To say China is booming therefore demand is insatiable - that's not strictly true. If prices go too high - and I would suggest they are at those levels now - we will see serious consequences for demand, and equally we're seeing the producers beginning to respond with new production. It could all get very messy in the end.
LINDSAY WILLIAMS: It's starting to look very messy anyway. Do you think then that this last 15% or 20% is going to be damaging long-term not only to the investors that are getting in right now because the bubble is going to burst, but also to producers like BHP Billiton and Anglo American?
JOHN CLEMMOW: I think that's very fair to say. What they will do is reap short-term benefits, and they'll get cash flow they couldn't have expected - but the consequences for long-term demand could be very profound. Equally, these prices are going to encourage new entrants into the market - so they will wake up five to 10 years down the line and there will be a lot more, again using the example of copper, producers out there. Again, I've got to say that my caveat all the time is that gold is different.
LINDSAY WILLIAMS: Yes, gold is very different - gold is at the highest level I've seen it around $720 an ounce. We love rumours on this show - London Metal Exchange members may be having cash flow problems?
JOHN CLEMMOW: No, not a couple. The rumour is that one has had problems, and I must say that's just a rumour. We have no facts on this whatsoever, and I'm not even sure it's a particularly good rumour - but at one stage copper prices were up by 8.5% today, and there were all kinds of stories swirling around the marketplace.
LINDSAY WILLIAMS: So you reckon the bubble is a real bubble, and the bubble may be about to burst in your opinion off the record?
JOHN CLEMMOW: Yes, but I said that a while ago. I think the interesting point here is that really nobody saw prices of the base metals getting to these levels. If you look at metals that are not traded - and it's very difficult to have a speculative interest in them - prices have been nothing like this, and in some cases the prices are actually down on those of last year. It's clear that the funds are having a material influence in these markets - but it's very difficult to say when that influence is going to turn and go the other way.
