Key commodities slid on Tuesday as investors booked profits amid fears that elevated levels of raw material prices could strain the appetite of the ailing Chinese manufacturing sector and slow growth further. The drop in commodity prices also reflected concerns the stimulus offered by the Fed last week may not be adequate to sustain the uptick in raw material prices as long as demand from biggest consumer China remains sluggish.
Major commodities, such as crude oil, gold, copper and aluminium, extended losses for a second straight day as euphoria over the Fed easing waned and investors shifted focus to fundamentals ? industrial activity in China is slowing and the stimulus measures by central banks would take some time to feed through the real economy.
Lack of clarity about projects worth $158 billion approved by China recently to prop up infrastructure, and the fact that such projects would come up only in the long term, bridled excessive investor optimism.
While analysts adopted cautious optimism about gold and crude oil retaining the current levels in the medium term as a fall-out of the Fed easing, they saw metals and iron ore sliding further on subdued Chinese demand. Moreover, as improved liquidity prospects have already stoked fears of inflation, China could exercise caution before mulling aggressive stimulus measures to boost industry despite a slowdown.
China?s factory purchasing managers? index dropped to 49.2 in August from 50.1 in July, the lowest reading since November 2011. Its state-owned firms recorded a 12.8% dip in profits between January and August, mainly on lacklustre performance by those in non-ferrous metals, chemicals, transportation and building materials businesses. For Chinese demand to pick up, commodity prices need to be at reasonable levels, they added.
Brent crude for November delivery tumbled 63 cents a barrel in the intraday trade on Tuesday to to $113.16 per barrel, after a $5 per barrel slump on Monday in a series of late, large-volume sell-off. US crude were down 57 cents at $96.05 a barrel. While analysts said some hedge funds might be offloading positions, some of them suspected the role of an automated computer trading programme behind the huge sell-off on late Monday. The US Commodity Futures Trading Commission has said it is probing the matter and checking with exchange operators CME Group and Intercontinental Exchange for this purpose.
Nevertheless, indications that higher crude prices could undermine China’s consumption potential and hurt growth also weighed. However, analysts believe anti-US protests over a film considered by many to be blasphemous to Islam could support crude prices in the near term as the commodity usually gains from uncertainty and geo-political tensions.
Investors flocked into commodities earlier this month after the European Central Bank decided to purchase bonds issued by struggling euro zone members to contain a debt crisis and the Fed announced last week it would inject $40 billion a month into the US economy until the jobs market recovered significantly. The Fed easing drove down the dollar against a basket of commodities, improved liquidity prospects and fed into stronger commodity prices as inflation fears loomed.
Moreover, the continuing fiscal problems in southern Europe added to fears that more reforms would be required to bring the struggling bloc back into the path of a strong recovery.
?The weaker dollar has fed into stronger commodity prices, but it’s more a speculative move on inflation expectations rather than any optimism on growth,? CMC Markets senior market strategist Brenda Kelly told Reuters. ?The ECB is buying time. It will make a difference to future debt, not to existing debt. In the US we’ve seen an increase in 10 year bond yields… I think they’ll be using lot of this (new money) to pay down existing debt, it won’t necessarily feed into growth,? Kelly added.
Gold climbed down from a six-and-a-half month high with spot gold losing 0.3% at $1,756.09 an ounce intrday, while US December gold futures shed $11.60 an ounce at $1,759. However, analysts said improve liquidity prospects following the Fed easing, fears of inflation and central bank purchases would support gold in the coming days.
Silver shed 0.3% at $34.09 an ounce intraday on Tuesday, having tracked gold to a six-and-a-half month high at $34.92 last week.
Three-month copper on the London Metal Exchange lost 0.9% to $8,222.25 per tonne intraday, dropping from a four-and-a-half month high of $8,411 hit last week, as worries about the Chinese economy gained pace. China accounts for around 40% of the global refined copper demand.
LME copper rallied 3.8% on Friday, responding to Thursday’s Fed announcement of another round of quantitative easing, in its biggest daily percentage rise since June 29. Copper rally was also aided by a weaker dollar, which hovered near a seven-month low versus a basket of currencies on Monday. A depreciating dollar makes commodities priced in the greenback cheaper for users of other currencies.
The three-month aluminium contract declined to $2,148 a tonne intraday from $2,167.
Hedge funds and speculators parked more than $6 billion in U.S. commodity markets last week, the highest in three weeks, just before the Federal Reserve announced the stimulus. According to the median of forecasts from a Reuters poll, the Federal Reserve could buy $600 billion of bonds under its new stimulus programme, and would look for a US unemployment rate of 7% from more than 8% now before it halts bond purchases.
However, iron ore prices inched up on Tuesday, although analysts said it was more due to a rally in steel prices last week than any change in the fundamentals of demand and supply, and the rise might not sustain in the coming days, thanks to lacklustre construction activity in China. The benchmark 62% iron ore rose to $106.5 a tonne from $105.1.