Advertisement

Carnage in commodities

Commodity prices have hit their lowest level since the late 1990s. And while there is scope for a rally in 2016, an upturn is unlikely to mark the start of the next long-term up-cycle.

Well, there goes the commodities supercycle of the early 21st century. The Bloomberg Commodity index, which tracks the prices of 22 raw materials, has hit its lowest level since the late 1990s. Down around two-thirds from its 2008 peak, and by a quarter this year, it is heading for the worst of five straight years of declines. All but one of the 22 commodities have fallen in 2015; the outlier has been cotton, up 4%. The worst performance has been natural gas, down 50%.

Advertisement - Article continues below

Healthy supplies, lower demand, and a strong dollar, which weighs on raw materials because they are priced in dollars, have been the main problems.The prospect of higher US interest rates can also hamper commodities they have no yield and thus look less appealing than other assets.

Is this the bottom?

Oil has grabbed the headlines again this week, with Brent futures slipping to an 11-year low of around $35 a barrel. Yet "it's not exactly looking as if there is light at the end of the tunnel", as Saxo Bank's Ole Hansen puts it. The glut just keeps getting bigger, with Iranian and Libyan oil now looking set to return to market and oil cartel Opec pumping at full throttle to drown the American shale industry.

But shale "continues to confound its doubters", says Kevin Baxter of The Wall Street Journal. The number of rigs rose by 17 last week, so the "predicted free fall in production" in early 2016 is unlikely to occur. Few now expect the market to come back into balance before 2017, and Goldman Sachs thinks oil could fall to $20 a barrel next year.

Glimmers of hope for metals?

But could this be too gloomy?The gloom on China, the key driver of metals demand, may be overdone.Longer-term, its demand growth is dwindling as the economy shifts away from capital investment. But for now, the outlook is improving. In volume terms, commodity imports rose by 17% year-on-year last month, the biggest jump in two years, says Capital Economics. Recent monetary stimulus and infrastructure spending is "feeding through into domestic demand".

All this suggests that there could be scope for a rally in metals prices in 2016.But given the supply picture, the high dollar and relatively subdued demand growth outside the Middle Kingdom, any rally seems unlikely to mark the start of the next long-term up-cycle.

Advertisement
Advertisement

Recommended

Visit/investments/commodities/600639/commodities-look-cheap
Commodities

Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
Visit/508874/commodities-are-dirt-cheap-but-is-it-time-to-buy
Commodities

Commodities are dirt cheap – but is it time to buy?

Commodities are staggeringly cheap, says Dominic Frisby. By some measures, they are twice as cheap as they were at the turn of the century. But does t…
12 Jun 2019
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/investments/commodities/industrial-metals/601401/money-printing-infrastructure-base-metals-copper
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020

Most Popular

Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020
Visit/investments/stockmarkets/601460/disease-rioting-and-mass-unemployment-so-why-are-markets-soaring
Stockmarkets

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020