18/05/2011 (The Star) - Growth concerns and inflationary pressure continue to plague the commodity markets, which are experiencing the worst rout since 2008 when the subprime crisis came to a head.

The Standard & Poors' GSCI Index, a measurement of the price performance of 24 raw materials, have fallen since the beginning of May and is now where it was just before Lehman Brothers Holdings Inc filed for bankcruptcy.

Spot gold for one has dropped more than 4.60% since the end of April while crude oil has tumbled more than 14%.

While observers expect demand destruction due to a combination of high prices, monetary tightening measures in emerging Asia and renewed worries over Greek debt as well as concerns over US growth, others believe price drops could usher another round of restocking by China and India.

Phillip Futures Pte Ltd analyst Ong Yi Ling expects robust demand for gold from China and India to continue this year.

“India and China are the largest and second largest consumers of gold respectively. Physical demand for gold in Asia may help to cushion gold's move lower in the event investment demand starts to wane,” she said in an email reply to StarBiz.

Bloomberg reported sales of gold coin were also on-track to record the best month for the year, suggesting that the bullish trend for gold could go further.

Meanwhile, CIMB Investment Bank Bhd analyst Ivy Ng said in a report yesterday that China and India might buy more palm oil to replenish their stockpiles. Crude palm oil benchmark futures have fallen since Feb 11.

The price movement of agriculture futures are also complicated by other factors such as weather and their correlation with other commodities.

Corn, soybean and wheat futures have risen after wet weather delayed planting in the US Midwest. Rubber prices have fallen because crude oil's drop has made the commodity less desirable as an alternative for tyre products.

Rabobank global head of agriculture commodity markets research Luke Chandler said in an April report that weather disruptions and low inventories would make the outlook for corn, soybean, wheat and cotton bullish.

He said low supply would remain a concern although farmers were responding to higher prices by planting more while “the need to ration demand of dwindling old crop supplies will maintain and increase prices, with corn and cotton leading the way as we move into the weather market”.

Bank of America-Merrill Lynch global head of commodity research Francisco Blanch said signs of demand destruction could already be seen with airline passenger loads and utilisation starting to drop.

He told Bloomberg in an interview yesterday that the pressures that have been building up in the emerging markets due to inflation and rapid interest-rate hikes coupled with the end of the quantitative easing programme by the United States as well as the euro-zone debt crisis did not paint a rosy picture.

While Blanch said these factors would take the steam off the commodity markets for a few months, this would not be the end of the commodity bull.

Last month, International Energy Agency executive director Nobuo Tanaka said global economic growth could be slowed by “very high” oil prices, which had risen as political problems in the Middle East escalated.