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El Nino a looming wild card for commodities

A frog is seen on ground cracked by drought in the Las Canoas Lake, some 59 km (37 miles) north of the capital Managua April 8, 2010. The lack of rain caused by the El Nino meteorological phenomena decreased water level in Las Canoas Lake, located in the center of Nicaragua, affecting approximately eight thousand people who live in the surrounding areas.

Oswaldo Rivas/Reuters

Commodity traders are placing their bets on El Nino.

The periodic weather phenomenon leads to torrential rain in South America and droughts in Asia and Africa, and may provide a needed boost for commodities after last year's slump in prices.

Weather forecasters around the world are predicting that a shift in climate patterns could occur this summer, with some warning of the strongest El Nino in more than a decade.

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"One should prepare portfolios to actively trade that event," Société Générale SA said in a research note released on Tuesday.

"We see support for base metals, especially nickel and zinc, as well as more volatility for sugar, cotton, coffee and cocoa."

The severe weather event, which happens when temperatures warm in the Pacific Ocean, could cause flooding in copper and zinc mines in South America.

It could also cause droughts in resource-rich regions, threatening sugar crops in Thailand and India and drying up waterways needed to transport ore in Indonesia, the bank said.

Those disruptions could help pick up depressed metal prices. One metal bucking the trend – nickel, already up nearly 50 per cent this year – stands to benefit the most.

Société Générale looked at the past seven El Ninos in the 1990s and found that nickel was the best-performing commodity during the meteorological changes.

The silvery metal rose an average of 14 per cent. Copper gained an average of 8 per cent, zinc increased 1 per cent, soybean jumped 3 per cent and coffee climbed an average of 10 per cent. On the down side, wheat lost an average of 5 per cent and sugar fell 10 per cent, according to the bank.

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"But you can't trade that blindly," said Michael Haigh, one of the authors of the report and Société Générale's head of commodities research, based in New York.

For instance, there is a glut of copper in the market and the economy of the world's largest metal consumer, China, is slowing. That has led to this year's 10-per-cent drop in copper prices.

Nickel, however, has jumped to $9.46 (U.S.) a pound from $6.32 this year on supply concerns.

Although the market is currently flooded, Indonesia's decision to ban raw material exports in January, coupled with fears that the West will somehow curtail Russia's nickel production, has fuelled worries of a shortage.

Some analysts predict a nickel deficit by 2015 if Indonesia does not lift its ban. The Southeast Asian country is the world's largest producer of nickel and is responsible for about 20 per cent of global supply.

Despite the fact that Indonesia is not shipping any ore, Mr. Haigh said the occurance of an El Nino would create a "perfect storm" for the metal that the market could not ignore.

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If Indonesia's "production is completely decimated because of the El Nino" and they wanted to increase their exports they couldn't," he said.

Other commodity experts are not as bullish about the impact of El Nino. Bart Melek, head of commodity strategy for TD Securities, said the weather phenomena will probably not be "all that material."

"We try not to forecast the weather," he said.

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Economics Reporter

Rachelle Younglai is The Globe and Mail's economics reporter. More


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