Rising Prices Are the Last Thing Metals, Other Commodity Markets Need

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Source: Istock

Sounds counter intuitive, doesn’t it? Well, not really when the you look at the reality of the situation as the Financial Times has done in a recent article based on research and commentary by Australia’s Macquarie Bank.

2016 marked a turning point for most commodities. After 18 months of declines, prices have surged this year in a manner not seen since the 2009-10 Chinese stimulus. Plentiful Chinese liquidity has boosted sentiment and order books, the FT points out, across a range of industrial metals and oil, in spite of an underlying backdrop of excess production capacity and inventory overhang.

What Has China’s Stimulus Done?

Beijing has pumped liquidity into the real economy through property and infrastructure projects getting the latest new five-year plan off to a flying start.

However, despite the strong macro number the FT observes, there is a growing sense hopes for future demand are proving uncertain and that this year’s strength is proving to be just another mini-cycle around the much larger trend.

Beijing seems aware it may have overcooked the stimulus and is mitigating some of the pressure by curbing liquidity. The article cites steel trader inventory as a good indicator in this regard. Over the past couple of weeks, it has started rising against seasonal averages — a good indicator of problems in each of the last four years.

What Trades Show

As traders are no longer able to shift material as quickly as they previously could, they will reduce purchases from the mills who, in turn, will have to cut both prices and production. And when cycles turn, and as refined production is cut, the effect further upstream in the chain is amplified. As a result, Macquarie foresees lower iron ore and alumina prices in H2 2016.

Are Rising Prices Bad?

Coming back to our headline, this price recovery may actually be doing more harm than good. For the first time since the financial crisis, the rate of supply adjustment had been accelerating last year as miners and refiners had finally faced up to the overcapacity and took action.

Some hard decisions were being made and firms have been writing down assets with a view to long-term mothballing or closure, but this year’s price increases have encouraged restarts rather than rationalization in spite of the inventory overhang and supply glut that exists for many commodities, pushing back the point of rebalancing and the prospects for long-term price increases in the medium term.

Comment (1)

  1. Ronaldo dos Santos says:

    This is a very interesting article. It promotes discussion of the big picture associated with commodity markets. I believe that not all metals are created equal! Although the situation of supply/demand for iron and aluminum seems to be quite unbalanced currently, this is not the case for other commodities, such as cobalt and zinc. Therefore, commodity price trends should be evaluated considering specific market conditions, including upcoming major projects. Moreover, financial policies may affect commodity prices (e.g. dollar strength). Definitely, commodities do not need accelerated price changes. Sustainable economic growth is key for a healthy mining industry. Global society must create check and balances for reducing speculative initiatives aiming exclusively short term (or localized) benefits. Unmanageable demand for commodities is the last thing this market need…

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