China’s massive stimulus package could be just the trigger commodities need to resume a bull run, says Frank Hemsley. He says more G20 nations will likely follow China’s lead after the coming global summit. And when all these projects get underway in the next year, demand for metals and grains will recover strongly.
This from Fleet Street Newsletter:

Since this whole credit crunch began, investors pretty much everywhere have been hit. It doesn’t matter what sector a company is in, its share price is less now than what it was in July. But there are a couple of sectors that have really outperformed the rest of the market. And I mean “outperformed to the downside”. In other words, they’ve fallen further and faster than other sectors.

The first is no surprise. It’s the banks and other financials. It’s no surprise, because that’s where it all started.

This chart shows how financials have fallen further than the Dow Jones.

But an even more alarming sell-off has occurred in another sector: commodities. This chart of the Reuters/Jefferies CRB Index demonstrates how commodities fell out of favour in July and have lost almost half their value since.

It’s worth stepping back a little to see what happened before this. Colleague, Justice Litle, in Baltimore notes:

“When the commodity bull really hit stride, it was largely based on a strong outlook for global growth. With so many emerging market countries coming of age, resource after resource was projected to be in short supply as far as the eye could see. Investors of all stripes and sizes, from institutional on down, wanted a piece of the action.”

And so we had one of the biggest bull runs in recent history.

But then, the credit crunch really hit home. As we’ve seen, it started in the financial sector… but pretty soon spread to commodities.

“The mortgage bubble popped, trust and liquidity evaporated, and credit and commerce fell off a cliff,” continues Justice Litle. “Not wanting to be left out, commodity prices jumped off a cliff too.”As investors scrambled to cover losing positions in the financial sector, they closed out winning trades in other positions. Where were their biggest winning trades? Commodities punts were certainly well up there.

As this hot money has been taken off the table, sky-high commodity prices came back to earth with a bump.

“Now, though, things have come full circle,” explains Justice. “Commodities fell so violently and so quickly, we’ve been rudely transported backwards (or perhaps forwards) to the “low prices cure low prices” part of the cycle again!”

What he means by the “low price” cure is that when a commodity gets cheap enough, producers tighten their belts. They stop going after new projects and cut back existing production. Some producers even give up altogether.

Eventually reduced supply matches up with newly reduced demand. Then things stabilize, prices fall and demand shifts upwards, and the cycle begins again.

And there’s some news just out that could set off the next leg up in the great commodities bull run.

On Sunday, China announced a huge $586 billion package to sustain its economic growth in the next two years. The 10-point plan allocates money for, among other things, affordable housing, rural infrastructure, railways, power grids and rebuilding after the devastating earthquake in May.

Expect to see further stimulus packages from other G20 nations following their scheduled meeting on 14 – 15 November.
And when all this spending to boost world economic growth starts happening over the next year or so, we could well start to see a rebound in demand for metals and grains.

Source: Kick Starting The Next Leg Of The Commodities Bull Market