So much for the commodity recovery.
After last year’s rally that ended five straight years of declines, prices of everything from crude oil and zinc to sugar and soybeans are once again mired in slumps.
The outlook for industrial materials like iron ore and coal might get even worse, with slowing economic growth in China — the world’s top consumer — compounding global surpluses.
The Bloomberg Commodity Index has dropped for three straight months, the longest decline in more than a year.
While demand for many raw materials remains strong, the growth and the tight supplies that supported last year’s rally are fading, according to Macquarie Group Ltd.
Oil inventories are so large that OPEC and its partners agreed last month to extend this year’s production cuts for another nine months.
Global stockpiles of grain before the this year’s harvest are the biggest ever, and a London Metal Exchange price index is in its steepest decline since 2015.
“You can see weakness emerging in many parts of the supply chain,” Colin Hamilton, global head of commodities research at Macquarie, said by telephone from London on Thursday.
Some investors are betting prices have peaked amid signs that industrial activity is slowing in China, the world’s second-largest economy and the biggest buyer of many raw materials.
The Caixin Manufacturing Purchasing Managers Index showed a contraction last month, the first in 11 months.
China’s imports of refined copper in April dropped by the most in six years and were the smallest since October last year.
Among the worst hit in recent months was iron ore, one of the industrial metals and bulk commodities that are now past their cyclical peak, analysts at Macquarie said in a report on Wednesday.
The raw material used to make steel rallied 81 percent last month and touched a two-year high of US$94.86 per tonne in February, as China stockpiled supply and looser economic policy stoked demand.
Since the end of February, the price has tumbled 39 percent to US$55.97 on Thursday, the lowest since October last year, according to Metal Bulletin Ltd.
The price fell about 8 percent this week.
Macquarie predicted the slide will continue, averaging US$50 in the third and fourth quarters, before slipping to US$47 next year as China looks to rein in lending to industrial sectors to get debt under control.
“China is tightening and that’s never a good thing for commodities,” Hamilton said.
COPPER CONCERN
Strong underlying copper demand in China has been masked by a surge in scrap supply after a jump in prices last year, Macquarie said.
Still, copper fabricators in the country are to face headwinds as usage in areas like real estate slows in the second half of the year.
The bank sees copper averaging US$5,600 per tonne in the fourth quarter, down from US$5,619 on the London Metal exchange on Friday.
The metal’s price is down 1.2 percent for the week.
As a bellwether for the global economy, copper’s slide reflects fading optimism for a rebound in manufacturing, as well as less concern over supplies caused by mine disruptions earlier this year, according to Ole Hansen, head of commodity strategy at Saxo Bank A/S.
“The supply story has been propping up copper as concerns about Chinese demand have started to come through,” he said by telephone from Hellerup, Denmark.
GOLD SHINES
The outlook is not all gloomy.
Macquarie urged investors to buy precious metals like gold or silver, which have been rising, and select commodities where supply might be constrained by production limits in China, including aluminum and possibly stainless steel.
Spot gold gained 0.7 percent this week to US$1,276.3 per ounce and spot silver rose 1.2 percent to US$17.52 per ounce.
Hansen also sees precious metals benefiting, likely from a slower pace of US interest-rate increases this year as a slump in oil and other commodities eases inflation pressure.
Funds piled into gold at the fastest pace since 2007 in the week to May 23.
With further losses eyed in well-supplied bulk commodities from metallurgical coal to manganese, Macquarie advises switching into metals like zinc and tin where supply constraints will offset softer demand, as well as markets like aluminum and alumina, where Chinese environmental reforms could crimp output.
The bank also sees opportunities in metals like uranium that have fallen well below the cost of production, as well as precious metals, which might see inflows as hopes for a global reflation in economic activity continue to fade.
“I’d definitely be defensively positioned in the main and we’d be happier with precious metals exposure,” Hamilton said.
Silver is the bank’s top pick on a six-month basis.
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