Commodities cycle: Is the worst of the pain behind us?
Call it “All Quiet on the Commodities Front”.
Which is not a bad thing; as this is being written before the Federal Reserve makes its decision on whether to lift interest rates, this feeling of calm is probably a good thing. A lack of volatility – one hopes – means that the Fed won’t scare the commodity horses (in either direction).
And there’s even good news on the rare earth front with Reuters reporting that China’s demand for these elements “is likely to soar more than 50% over the next five years”. Chen Zhanheng, vice-secretary general of the Association of China Rare Earth Industry, told a conference in Shanghai this week that domestic consumption was expected to rise nearly 9% this year to 97,700 tonnes, and would end the decade at nearly 150,000 tonnes, up from 90,000 tonnes in 2014.
If this is the case, it will certainly encourage non-China REE hopefuls to press on, holding out the hope that China might have to curb exports further to satisfy domestic manufacturing demand (and possibly even look to imports for heavy rare earths).
On the broader front, the metals markets seems to be stabilizing; we have a few days without any sudden, heart-stopping movements.
Is it over, then? (The downward plunge in the commodity cycle, I mean.) Well, Peter Strachan who runs the commodity analysis business StockAnalysis in Perth, Western Australia, says he thinks “the Australian resource sector is now either very close to its maximum point of pain or it is 85% of the way to that point.”
The slight weakness in the U.S. dollar this week (at least against some currencies) has probably helped stabilize the metals ship of state. Prices may fall again, possibly across all the minerals, oil and soft commodities, but you get the feeling that it will be a gentle slide at worst. After all, they’ve all pretty well taken their licks, so Strachan might be right in saying the pain has reached its maximum point.
The team at Capital Economics in London has compiled an overview. Their conclusion: “After the mid-Summer volatility in global financial markets, commodity indices have had a period of relative calm since mid-August”. The S&P energy index did worst among the commodity indices, while the industrial metals index actually rose 1% month on month.
However, they point out that a number of commodities have seen a large decline in investor interest over the past month, highlighted by a 25% fall in the number of open-interest contracts for palladium, and a 13% and 15% decline respectively for corn and wheat.
What is most encouraging – and here I am reading between the lines of this report – is that the futures curves for industrial metals indicate some changes, but no great volatility. Copper, further out, looks like getting a little more colour in its cheeks, but zinc may be losing some ground in terms of investor expectations.
On the soft commodities front, Capital reports that investors have sharply cut the number of short positions on sugar, and cocoa is also now net-long. Corn prices might be helped by forecasts that the next harvest total may not be so good.
And a very interesting piece of news on the gold front: Randgold Resources is considering a spend of up to $1 billion to help AngloGold Ashanti revive its huge Obuasi mine in Ghana. It is estimated there are still 5 million ounces to be extracted.
Randgold has not made a discovery since 2009 and has no new mines in development.
Does that company see a gold squeeze ahead? It is getting harder and harder for the major producers to replace the ounces they are mining. And people still want to buy gold. (And when was the last time there was a gold surplus, with bars of metal lying around unsold? Answer: probably never.)
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