These are not the best of times to be a commodity investor. Commodities have been hammered in the global market day after day and week after week this year.
These are not the best of times to be a commodity investor. Commodities have been hammered in the global market day after day and week after week this year. The Bloomberg Commodity Index — which tracks the prices of 22 commodities ranging from energy products to metals to farm items — has dropped over 7% this month to a fresh 13-year low of 95.18 in intraday trade on Thursday.
While oil is presumed to be the most obvious villain, it’s base metals that have caused the maximum slide in the commodity index, while sugar and coffee have suffered the worst fall this year. If the Bloomberg Commodity Index is any indication, while economic slowdown in developed nations has mostly been blamed for the commodity crashes in recent years, two of the BRICS nations, China and Brazil — share a fair amount of blame for the latest drop due to the importance they command in the price movement of these commodities.
Coffee and sugar have lost around 27% each this year in the index due to a slide in prices following a depreciation of the currency in biggest producer Brazil and a glut in other producing nations, including India (in the case of sugar).
A slowdown in China, the world’s biggest consumer of most commodities, and a recent crash in its stock market also reinforced fears that these losses could infect the real economy and consequently hurt raw material demand. Base metals, including copper and nickel — which are down 12% and 23% this year, respectively — have affected the Bloomberg Commodity Index the most, even though more valuable items like oil and gold (down 12% and 6.8%, respectively) have heavier weightings in it.
Base metals’ contribution to returns this year, according to the index, have been less than -2%, followed by energy products (-1.6%) and farm items (-1.4%).
Commodity indexes, including Bloomberg’s, may drop further in the coming days, with the World Bank forecasting another year of fall for commodities and Goldman Sachs predicting a 44% plunge in copper prices through 2018, assuming China’s demand to grow at its slowest pace in two decades.
According to the World Bank’s latest “Commodity Markets Outlook”, average prices for fuels such as crude, natural gas and coal could crash 39% this year from 2014 levels. Prices of metals and fertilisers may fall about 12% each, it added. “All main commodity price indices are expected to decline in 2015, mainly due to abundant supplies, and in the case of industrial commodities, weak demand,” it said in the report.
The demand for commodities, especially metals and coal, could slow in China as it attempts a shift to a more services-oriented economy from a manufacturing-driven one.
The bank has forecast that crude oil prices could tumble from an average of $96 a barrel in 2014 to about $57 this year, although the latest forecast is still higher than its April prediction of $53. The projection — based on an equally weighted average of Brent, Dubai and West Texas Intermediate crudes — reflects some improvement in US fuel consumption and a 17% rise in prices between April and June. The bank noted that gas prices could fall sharply in Asia, Europe and the US, while coal will plunge 17% due to competition from other fuels, including gas, and a shift toward renewable energy.
Iron ore prices may dip to $55 per tonne in 2015, down over 40% from the average of last year, on low-cost mining operations in producing countries such as Australia and Brazil. Metal prices could see a 17% drop as well. Similarly, average prices of farm items could drop 11% from 2014.
Gold prices, having hit their lowest since March 2010 on Wednesday, inched up a bit to $1,101.25 an ounce at 5.30 pm on Thursday. However, analysts, including ABN Amro Bank’s Georgette Boele and Robin Bhar of Societe Generale, say the bullion will approach $1,000 by December this year.
Copper — which tracks the health of the global economy, especially of China — was hovering around six-year lows in intra-day trade on Thursday following Goldman Sachs’ bearish forecast. Goldman expects copper prices to touch $4,500 by the end of the next year, down 16% from Wednesday’s close,. “We substantially lower our short-, medium- and long-term copper price forecasts on the back of lower Chinese copper demand growth forecasts, increased conviction in copper supply growth over the next three years, and less conservative assumptions regarding mining cost deflation in dollar terms,” Bloomberg reported, quoting the report. The LME Index of the six major metals, including copper and aluminium, has plunged 14% this year and is heading for a third monthly fall.
Having hit $5,315 a tonne in early trade, three-month copper on the London Metal Exchange fell 0.7% to $5,320 a tonne by 6.40 pm on Thursday, extending a 1.7% drop in the previous session. On July 8, the base metal had hit a six-year low of $5,240 per tonne on concerns the persistent crash in China’s stock markets could affect other markets as well.
(With inputs from Bloomberg)