Time up for commodities boom? Some bulls think so....

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I came through an interesting article and I am pasting it here:


WSJ HEARD IN ASIA - Time up for commodities boom? Some bulls think so
B Y P ATRICK B ARTA ························BANGKOK

Global investors keep pouring money into com modities and the companies that produce them. But a few analysts are starting to advise against it.
One is Sean Darby, a Hong Kong-based analyst for Nomura International. Over the years, he has advised clients to buy stock in a number of commodity-related companies, especially during the past six months, when he correctly predicted commodity prices would climb even higher.
Now, he says, a new scenario is starting to play out. Inflation is getting out of hand in some regions, especially in Asia, and that means central banks and governments will have to take more aggressive steps to rein it in. Those steps—which will likely include interest-rate increases in some countries—should take some steam out of commodity markets, or at least keep them from going much higher, Mr. Darby argues.
“We’ve made our gains in this [sector] and will watch from the sidelines” for now, he says.
Mr. Darby’s voice remains a somewhat lonely one, at least among investors, who continue to drive commodity prices higher. So far this year, tin prices are up more than 40%, oil is up more than 30%, and soybeans are up about 10%.
But a few other analysts are joining in the warnings that some commodities might peak soon, if they haven’t already. Sam Stovall, the chief investment strategist at Standard & Poor’s, said oil “is about as overbought as any- time in the last 10 years.” Lehman Brothers analyst Edward Morse has said that commodities including oil “may face a sharp correction” that is “likely to happen around the turn of the year.” An engineer by training, Mr.
Darby joined Nomura in 2001.
He has recommended a number of commodity-related stocks that have performed well since then, including some in agriculture, such as Khon Kaen Sugar Industry, a Thai sugar miller. It has seen its share price roughly triple over the past three years.
Mr. Darby made another bullish call on commodities in September. And he reiterated it in January, telling clients that equity investors were likely to face “uncomfortable headwinds” because of rising inflation, a sagging dollar and weakening global growth linked to the world-wide credit crunch. At the same time, central bankers including U.S.
Federal Reserve Chairman Ben Bernanke were lowering interest rates, flooding the financial system with additional liquidity.
Those conditions would send prices for gold and other commodities even higher, Mr.
Darby argued, as investors looked for safe havens. He recommended a “basket” of companies in commodity businesses, including Cnooc, a Chinese oil company, and Banpu, a Thai coal producer.
But now, that call is “at risk of becoming a victim of its own success,” Mr. Darby wrote earlier this month.
As commodity prices charge higher, that is increasing inflation so sharply that central banks and government policy makers can’t ignore the problem much longer, especially now that there are signs the chaos in global credit markets is settling down. Dealing with inflation will require moreaggressive steps from central bankers to mop up some of the excess liquidity, and “that will be bad for commodities,” he says.
All of this is especially true in Asia, the region whose demand helped create the commodity boom. The inflation rate has surpassed 20% in Vietnam and is expected to blow past 10% soon in Indonesia. It has also accelerated noticeably in Singapore, China and elsewhere.
Cooling inflation So far, many Asian governments have tried to cool inflation through relatively modest measures such as requiring banks to hold more deposits on reserve, which leaves them less money to lend, and price controls.
But those steps haven’t been effective, and price con trols are expensive to maintain. That leaves more interest-rate rises as the most likely option to tame inflation.
In Indonesia, for instance, the central bank earlier this month raised rates by a quarter percentage point to 8.25%, its first increase in more than two years.
Higher interest rates should slow growth, even in booming economies such as China and India, curbing their need for more raw materials. If the U.S.
raises rates or even just stops lowering rates, it could also bolster the U.S. dollar by making investments in that country more attractive—another development that could ease demand for commodities.
Looking elsewhere The bottom line: Mr. Darby contends that it is time to look for other investments. That doesn’t mean commodity prices will collapse, or that all companies tied to commodities will perform badly. But for now, he says, he isn’t recommending his basket of commodity companies. In his view, there are better options in other sectors, including telecommunications and Internet companies.
Many analysts disagree. In a May 16 note, Deutsche Bank said it remains bullish on many commodities, and that oil prices might keep rising. In a May 22 note, analysts at Scotiabank in Toronto argued that tight supplies would drive oil prices even higher in 2009, with an average of $135 to $140 that year.
Other banks have been bolder, such as Goldman Sachs, which raised eyebrows when it predicted in 2005 that oil would top $100 a barrel.
Early this month, Goldman Sachs said that the possibility of oil in the $150- to $200-abarrel range is “increasingly likely” over the next six to 24 months. It has recommended a batch of energy companies, including Chevron and ConocoPhillips, as well as gold producers such as Barrick Gold of Canada.
David Abramson, a researcher for BCA Research Group in Montreal, says he thinks Mr. Darby is broadly right—but probably too early with his warning. Over the past two months, Mr. Abramson says, he has seen more evidence that commodities may be entering a “mania” phase, as more and more investors move blindly into the sector.
Mr. Darby’s thesis “makes complete sense,” he says.
Even so, Mr. Abramson says, investors often make good money playing the market in the latter stages of a cycle, when it experiences some of its fastest moves.
And for now, the fundamentals underlying commodity demand are still in place. In China and elsewhere,”you still have powerful demand that is structural in nature and very commodity intensive,” he says.