A RARE SPEED BUMP IN COMMODITIES LONG RUN

New York, May 14- Commodities fell to nearly two-year lows last week, measured by a widely used benchmark, prompting investors to ponder whether the massive rally that began in 1999 may be faltering.

China is cooling down at the same time the U.S. is struggling to heat up, clouding the outlook for the world's two biggest consumers. And producers of some raw materials have ramped up supplies enough to create at least temporary gluts, particularly if appetites falter.

After a strong start to the year, prices for crude oil and gold have slumped by double-digits in percentage terms from their 2012 highs, and copper -an often-cited barometer of economic activity- also has fallen 8% from a peak for the year in February.

The commodities market has become hyper-attuned to moves in the world economy. Broad worries about the global economy, especially Europe's debt woes, also often override fundamental forces of supply and demand to drive prices.

That flummoxes even experienced traders, adding risk to a market that's increasingly popular with ordinary investors, but volatile.

"Any whiff of a slowdown, and the market sells off," said John Bailey, chief executive of Spruce Private Investors LLC, a Stamford, Conn., firm that has $3 billion under advisement and invests with nine commodity-focused hedge funds.

From the outset, the rally that began in 1999 was fueled by two diverging forces: Rapid growth in emerging markets sparked fresh demand, particularly from China, which joined the World Trade Organization in 2001. That move opened up hundreds of billions of dollars of trade with China. At the same time, supplies were limited as years of low prices had made producers reluctant to expand their operations.

The situation has since changed. Production has increased, largely from new methods of drilling for natural gas. Crude oil output has risen 16% since 1999, while copper is up 28% and aluminum 94%, according to U.S. figures.

The changes to the supply-and-demand picture, and the recent declines in prices, have ignited a debate over whether the so-called super-cycle in commodities is over—or, at least, is heading for the back-end of the cycle. Raw-materials markets are notorious for going through such periods of scarcity and then glut, sending prices on wild rides.

"Our feeling is that this commodity super-cycle has ended, and ended really in 2008," said Michael Shaoul, chairman of Marketfield Asset Management, in New York, which has $1.9 billion assets under management. The firm is betting that precious-metals prices will fall.

While analysts aren't predicting a prolonged decline in prices from here anytime soon, some say the commodities market may have entered a slower-growth phase, during which periods of falling prices will regularly interrupt what were once routine gains.

"It's going to be a flattish year for commodities," said Mark Keller, chief executive of Confluence Investment Management LLC, a St. Louis-based firm that manages about $1.4 billion, largely for high net-worth individuals. Mr. Keller's firm has reduced its investment in industrial commodities and increased its exposure to gold. "I think we'll hit a bottom at some point this year, and start rallying," he said.

For more than a decade, investing in commodities was practically a sure thing. Prices rose in nine of the 12 years starting in 1999. Even down years had explanations, such as the Sept. 11 attacks in 2001 and the global financial crisis in 2008.

On Friday, the Dow Jones-UBS UBS -2.50%Commodity Index, which tracks futures contracts for 20 basic goods, fell 1% to the lowest level since September 2010. U.S. crude oil, gold and cotton -all components of the index- helped lead the way down, as each hit fresh lows for 2012. The index is down 4% this year after a 13% drop last year, putting it on track for the first consecutive declines since 1997 and 1998.

To be sure, commodity prices remain high in historical terms—the Dow Jones-UBS Commodity Index has risen 73.2% since the end of 1998. And continued growth in China and other developing markets will keep them supported.

Also, prices for key goods can spike with any supply problems, such as bad weather. The cost of finding more rich veins of many metals is rising.

"The fundamentals for commodities are positive," said Mr. Bailey. "It's these macro issues that are really dominating short-term thinking”.

Still, the recent swoon has had a number of casualties. Several commodity-focused funds have struggled, seen significant redemptions, or closed in the past year. Fortress Commodities Fund, down 12.6% for the year through April, is closing this month, according to a filing.

The HFRX Commodity Index of commodity hedge funds is up 0.07% this year through March, after falling 10% last year, and investors are not expecting a rapid revival.

Rising supplies can have a significant impact on prices. Natural-gas prices have slumped thanks to a ramp-up in production. Increases in mine output have weighed on gold, putting at risk the metal's streak of 11 straight years of gains.

U.S. farmers are expected to plant more acres to corn than in any year since 1937, feeding expectations that a large crop could refill a thin bin.

"The supply story has faded," said Douglas Porter, deputy chief economist at Bank of Montreal BMO -1.33%. Demand, he said, is "the only significant driver from here”.

That pillar of the commodity rally also looks shakier, as China and other emerging markets try to manage a slowdown in growth.

Northern Trust, NTRS -1.35%which had $716.5 billion in assets under management at the end of March, is "neutral" on commodities, absent a move by China to stimulate its economy, according to Jim McDonald, the Chicago-based firm's chief investment officer.

Europe's problems compound the concern that a quick rebound is unlikely. "I think commodities are done for this year," says Peter Rup, chief investment officer of New York-based Artemis Wealth Advisors LLC.

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