Commodities: Industrial metals with rice is the 1994 recipe: Lisa Vaughan harvests some forecasts for the coming year

LAST year was generally a poor year for commodities. The Goldman Sachs Commodities Index, a basket of 19 commodities, shows that prices fell nearly 10 per cent in 1993.

But individually, commodities were more exciting than they have been in a long time.

As economic recovery prospects brightened and individual commodities reached cyclically low production levels, many markets grew more volatile. Prices for some raw materials suddenly moved sharply up or down, and investor interest was noticeably aroused for the first time in years.

Several commodities stood out. Maize prices soared by more than 40 per cent in 1993, after flooding caused massive cuts in US production estimates. Silver, always volatile, leapt by nearly 40 per cent as production fell.

Cocoa prices advanced by around 22 per cent, fuelled by political uncertainty in the Ivory Coast and declining stocks. Gold, an investor favourite, rose by about 20 per cent over the year but disappointed many when it collapsed in August after a thrilling rally.

Losers in 1993 were oil and industrial metals. Oil prices sank by nearly 30 per cent, and base metals prices fell 13 per cent against a background of faltering recovery and large stocks.

Prospects for commodity markets in 1994 look as lively as last year, and prices could be stronger. Economic growth, forecast to revive gradually in many industrial countries, should act as a spur to demand for raw materials. With many commodity prices still near their all-time lows, potential for recovery is great, especially if inflation re-emerges with any strength.

Neil Bresolin, executive director for commodity derivatives at Goldman Sachs, says: 'Stock markets are at record highs, bonds are backing up, but commodities are at record lows. We think they have the most attractive relative value.'

One of the most obvious areas for improvement this year should be industrial metals, after a slump of 38 per cent since 1988. Goldman Sachs expects this sector (excluding copper) to provide the best opportunities in commodities for 1994.

'Industrial metals have the highest correlation of any commodity to G7 gross domestic product,' Mr Bresolin says. 'If the recovery goes global, we expect industrial metals to pick up.'

All industrial metals except copper should have a higher average price in 1994 than in 1993. Lead, mainly used in batteries, is likely to be one of the first metals to recover and could rise the furthest. Stocks and output are both down, and prices are at historic lows.

William Adams, research analyst with the London metals firm Rudolf Wolff, predicts that lead prices could increase by 25 per cent this year, to an average dollars 500 a tonne after dollars 400 in 1993. Prices for tin and aluminium could also rise by more than 10 per cent, he adds.

The precious metals will see another volatile year, but gold may disappoint those secretly hoping for a rapid return to its early 1980s heyday. Silver is our pick again this year for the best precious metal performance.

Silver remains the only precious metal with falling supply (since it is a by-product of lead and zinc, where production was slashed). Andrew Smith, analyst for UBS, quips: 'Silver's normally unfashionable industrial exposure may be a positive as 1994 develops.' He believes the price could go much higher than the current dollars 5.10. Investors should beware, however, of silver's spiky nature.

Cocoa should also have a second consecutive year in the limelight. Supply deficits for three years running, after drastic production cutbacks in response to low prices, have caused some forecasters to turn unequivocally bullish.

Lawrence Eagles of GNI Research forecasts that cocoa prices could rise above pounds 1,500 per tonne this year, compared with the outgoing 1993 price of pounds 909 - an increase of nearly 65 per cent. The Economist Intelligence Unit (EIU) predicts a more modest 26 per cent increase this year. Watch this market - it is bound to be interesting.

But the surprise commodity of 1993, and possibly the one most likely to succeed in 1994, is rice. Traditionally in chronic surplus, rice's outlook has changed dramatically with the recent opening of the Japanese market to imports.

The Japanese rice harvest is forecast to be its worst since 1948, forcing Japan to authorise emergency rice imports and shattering its longstanding insistence on self-sufficiency.

According to the EIU, Japan will have to import about 1.5 million tonnes of rice this year. Because of this unexpected development, it foresees a 37 per cent jump in world rice prices in 1994, to dollars 337 a tonne from an average dollars 246 last year.

(Photograph omitted)