Buy Directly into the Future of Energy and Metals?

Buy directly into the future of energy, metals ?

FOR THE RISK-TAKING INVESTOR

IF YOU are a relatively sophisticated investor aged 21 or over, you can open a derivatives trading account at most major brokerages such as Phillip Securities or DBS Vickers Securities.

This will allow you to trade futures contracts on exchanges worldwide - from Bursa Malaysia's ringgit-denominated crude palm oil futures contract (FCPO) to metals contracts on the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (Nymex).

A futures contract represents a financial obligation to buy a certain quantity of a physical commodity at a preset date and price. Most brokerages will let you deposit your funds in Singapore dollars or any other major currency.

You can trade on futures exchanges and over-the- counter foreign exchanges on a margin basis, which means you can leverage so as to trade contracts with a larger nominal value. The margin is set to cover the price risk of the portfolio for a specified period.

There are three categories: energy and metal futures, which generally mean 'hard' commodities, and agriculture futures, for 'soft' commodities.

Energy

OIL is now trading at about US$110 per barrel and could soar to higher levels. But investors need to be well-versed in the price dynamics of the many varieties of oil contracts from light sweet crude to brent, which are traded on Nymex and the Intercontinental Exchange (ICE).

Metals

THE star performer last year was copper. Shortages due to inefficient excavation of old mines pushed up the price to over 360 per cent of the 2003 level. Some investors buy the stocks of big miners such as Freeport McMoRan and Southern Copper, but to do this, you need to open overseas trading accounts via your local broker.

Copper plays into the popular investment theme of 'What China Is Buying'. China's rapid infrastructure development has made it the world's largest consumer of many metals, but you zoom in on the ones it needs to import.

Zinc is abundant in China, while copper is found mainly in South America and tin in Indonesia.
For aluminium, China used to rely on its own production, but it is likely to become a net importer this year.

Said Standard Chartered commodity analyst Judy Zhu: 'The government clamped down on production a few years ago, so this may support global prices.'

Many investors are going for gold because the weakening greenback has pushed prices above US$1,000 an ounce currently. But they might still have further to go. Analysts have predicted that prices could range between US$700 and US$1,500 a troy ounce over the next three years.

Also, gold is more easily accessible investment-wise than some other metals. You can buy or sell physical gold such as gold bars, or gold certificates from banks such as the Canadian Bank of Nova Scotia and United Overseas Bank (UOB), but this attracts GST of 7 per cent.

Singapore investors can use monies in their Central Provident Fund Investment Scheme-Ordinary Account (CPFIS-OA), but the sum cannot exceed the available Gold Limit, which is 10 per cent of the total CPFIS-OA funds.

One thing to note is the high investment outlay for gold. A one-kilobar certificate can cost over $36,000. For sophisticated investors who want exposure to a variety of hard and soft commodities, ABN Amro is preparing to launch a call warrant that tracks the RICI Enhanced Global Index, an index designed by the bank and veteran investor Jim Rogers.

It will be based on the RICI, a commodity index developed by Mr Rogers in 1998 that covers 37 commodities and has generated returns of more than 500 per cent since July 1998.

Called zero strike participation certificates, or zero certs, the warrants have an exercise price of zero. If the index goes up by $1, the issue also gains $1, which makes it easier to track the performance of the index and calculate capital gains.

Each zero cert has an initial price of about $1; the minimum investment is about $1,000.

Soft commodities

THIS is a growing investment theme because consumers in China and India are wolfing down more food as standards of living rise. For instance, estimates put the wheat consumption of these two countries at as much as 39 per cent of the world's total supply.

In addition, with the 'green' movement, legislation in some places such as California has pushed farmers to grow corn not for food but to make ethanol-based energy products.

But beware the extreme volatility in the prices of soft commodities, including coffee, palm oil and rice, which spoil easily. Palm oil producers, for instance, who have a huge harvest might have to dump it on the market within a few weeks before it rots.

A savvy farmer might hedge his crop by selling futures contracts to lock in the price at which he will sell the palm oil. This hedging activity, combined with natural harvest cycles and unpredictable weather, can generate extreme swings in prices.

Corn prices have slid a little this year, but they were about 57 per cent higher than levels in 2003 and they could test new highs if demand for ethanol-based energy sources continues to soar.

Malaysian crude palm oil futures have gained more than 25 per cent this year, propelled by surging European demand, a flood of investments in commodity markets and Indonesia's plans to hike export taxes.

Unconventional plays

SOME off-the-beaten-track investments with upside potential include uranium and palladium.
Some experts say uranium prices are likely to go 'nuclear' in a few years as traditional sources of energy such as oil and coal run out and 'cleaner' sources such as uranium trump more expensive ones such as ethanol-based energy.

There are indications that global demand for uranium might surge in a few years. As of the middle of last year, there were 30 nuclear plants under construction globally, while another 70 had been planned and 150 more proposed. Meanwhile, supply from uranium mines and decommissioned nuclear weapons is limited.

Palladium recently made a popular debut as the new 'platinum' in jewellery, especially in the China market because it is cheaper for jewellery buyers to use while providing immense profit margins for manufacturers.

Consumption by the jewellery industry has more than tripled over the past two years, rising to 1.13 million ounces a year.

Source: The Straits Times